Friday, September 24, 2010

The Shoeshine Boy

To set up this post I will share with you two brief predictions I recently received by email. These were both in email blind copied to large groups of recipients that included me. The two senders do not know each other. In fact, their only connection is that they are both supporters of my blog on the highest order, I know what they each do for a living (very respectable), and I therefore hold them both in high regard:
Email 1:
This is a very orderly secular bull market. The bubble, that WILL come, is still about 2 or 3 inches to the right of the margin on the right side of this chart...
Email 2:
Perhaps we are talking about the first general realization among the investing public that the Fed cannot/will not rescue us with their magic wands and QEs… This may be it, the beginning of Stage 2 of gold's rally, where the smart money starts moving in. Stage 3 is next when the shoeshine boy tells you: Buy gold!
For those of you that don't know the meaning of the shoeshine boy reference, JFK's father, Joe Kennedy claimed that he knew it was time to get out of stocks in 1929 when he received investing tips from a shoeshine boy. Ever since, the shoeshine boy has been the metaphor for "time to get out"; for the end of the mania phase in which everyone, even the shoeshine boy, wants in.

Joe Kennedy

Joe Kennedy's credibility on this "bubble top calling" issue is bolstered by the fact that from 1929 to 1935 his fortune went from $50 million to $2.85 Billion in today's purchasing power. And the take-home lesson in this story is that it is time to sell ANYTHING once the shoeshine boy is recommending it. Because the next phase is the blow off phase where the item in question comes crashing back down.

Bubble Phases

And the fact that two of my favorite readers are now calling for an eventual bubble in gold reminded me that it has been 9 ½ months since I wrote Gold: The Ultimate Un-Bubble. Perhaps it is time for an update.

Now I'll grant that the point in both of the quotes above was that we are nowhere near the bubble top. And they were addressed to people that are very jumpy when it comes to bubbles because they have been burned by a couple bubbles in recent history. But even so, I think they expose a fundamental misunderstanding of what is actually happening today.

How Gold will handle even the Shoeshine Boy

Before I get into what is actually happening with gold today, I want to show you WHY it is happening to gold. And WHY gold is different. There's a unique thing that happens with gold. ANOTHER said it pretty clearly (even if still a bit cryptic) in his very first post:

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

In a future post I'll explain the context in which ANOTHER made this statement because it portends vast changes in the international monetary system directly in front of us. (Remind me of this. I was going to include it here but the post grew too long even without it. :) But for now, we need to look at why this statement is true. For this I turn to John Law. Well, not the real John Law, but another pseudonymous blogger like me using his name back in 2006:

An illustration

Let's start by comparing two hypothetical cases.

In case A, a million Americans decide right now to move all their savings into Dell stock, buying at the current market price no matter how high.

In case B, a million Americans decide right now to move all their savings into gold, buying at the current market price no matter how high.

In both cases, let's say each of these test investors has an average of $10,000 in savings. So we are moving $10 billion.

Neither gold nor Dell can instantly absorb $10 billion without considerable short-term increases in price. Because it would require us to predict precisely how other investors would react, we have no way to precisely compute the effects. But we can describe them in general terms.

In case A, the conventional wisdom is right. Our test investors should expect to lose a lot of money.

This is because Dell has a stable equilibrium price which is set by the market's estimate of the future earning power (price-to-earnings ratio) of this fine corporation. Because it is not the result of any new information about Dell's business, the short-term surge should not affect this long-term equilibrium.

Since there will almost certainly be a short-term price spike, many of the test investors will be buying at prices well above the stable equilibrium. In fact, the more investors we add to the test, the more each one should expect to lose. Doh!

But there is no way to apply this analysis to case B.

Precious metals have no price-to-earnings ratio. With gold formally demonetized (that is, with no formal link between gold prices and currencies such as the dollar, as there was until 1971), there is no stable way to price it. There is no obvious equilibrium to which the gold price must converge.

It is true that gold has industrial uses. It can be priced on the basis of industrial supply and demand. The conventional wisdom is that it is.

Thus we can say that gold, for example, is overvalued if gold miners are selling more gold than jewelry makers and other industrial users want to buy. At present (with gold near $700), they probably are. So if you follow this reasoning, the right investing decision is not to buy gold, but to sell it short.

But this just assumes that there is no investment demand for gold. On the basis of this assumption, it shows that gold is a bad investment. Therefore there should be no demand for it.

Therefore, when our case B investors put $10 billion into gold, that money has to be used to bid gold away from its current owners, many of whom already believe that the price of gold in dollars should be much higher than it is now.

So the result of case B is that the gold price will, as in case A, rise immediately. But it has no reason to fall back.

In fact, quite the opposite. Because the gold price is largely determined by investment demand, any increase in price is evidence of increasing investment demand. Mining production, noninvestment jewelry demand, and industrial use are relatively stable. Investment demand is a consequence of investors' opinion about the future price of gold - which is, as we've just noted, largely determined by investment demand.

This is not a circularity. It is a feedback loop. Austrian economists might call it a Misesian regression spiral.

Suppose you believe this. It's all well and good. But what does it really prove? Couldn't gold still be just another bubble?

And why should gold be a better investment because it has no earnings to price it by? This makes zero sense.

To answer these sensible objections, we need a few more tools.

Nash equilibrium analysis

The Nash equilibrium is one of the simplest and oldest concepts in game theory. (Nash is John Nash of A Beautiful Mind fame.)

In game theory jargon, a "game" is any activity in which players can win or lose - such as, of course, financial markets. And a "strategy" is just the player's process for making decisions.

A strategy for any game is a "Nash equilibrium" if, when every player in the game follows the same strategy, no player can get better results by switching to a different strategy.

If you think about it for a moment, it should be fairly obvious that any market will tend to stabilize at a Nash equilibrium.

For example, pricing stocks and bonds by their expected future return (the standard Wall Street strategy of value investing) is a Nash equilibrium. No market is infallible, and it's possible that one can make money by intentionally mispricing securities. But this is only possible because other players make mistakes.

(Nash equilibrium analysis of financial markets is not some great new idea. It is standard economics. The only reason you are reading a Nash equilibrium analysis of the interaction between precious metals and official currency now on the Web, not 30 years ago in the New York Times, is that the Times gets its economics from real economists, not random bloggers, and the profession of economics today is deeply tied to the institutions that manage the global economy. Real economists do not, as a rule, spend time thinking up clever new reasons why the global financial system will inevitably collapse. They're too busy trying to prevent it from doing so.)

What Nash equilibrium analysis tells us is that the "case B" approach is interesting, but inadequate. To look for Nash equilibria in the precious metals markets, we need to look at strategies which everyone in the economy can follow.

Let's focus for a moment on everyone's favorite, gold. One obvious strategy - let's call it strategy G - is to treat only gold as savings, and to value any other good either in terms of its direct personal value to you, or how much gold it is worth.

For example, if you followed strategy G, you would not think of the dollar as worthless. You would think of it as worth 45 milligrams, because that's how much gold you can trade one for.

What would happen if everyone in the world woke up tomorrow morning, got a cup of coffee, and decided to follow strategy G?

They would probably notice that at 45mg per dollar, the broad US money supply M3, at about $10 trillion, is worth about 450,000 metric tons of gold; that all the gold mined in human history is about 150,000 tons; and that official US gold reserves are 8136 tons.

They would therefore conclude that, if everyone else is following strategy G, it will be difficult for everyone to obtain 45mg of gold in exchange for each dollar they own.

Fortunately, there is no need to follow the experiment further. Of course it's not realistic that everyone in the world would switch to strategy G on the same day.

The important question is just whether strategy G is stable. In other words, is it a realistic possibility that everyone in the world could price all their savings in gold? Is strategy G in fact a Nash equilibrium?

There are no market forces that would tend to destabilize it. Or are there? Actually, it turns out that we've skipped a step in our little analysis.

Levitating collectibles

The problem is that the exact same analysis works just as well for any standardized and widely available asset.

For example, let's try it with condoms. Our benchmark of all value will be the standard white latex condom. We can have a "strategy C" in which everyone measures the worth of all their assets in terms of the number of condoms they exchange for. Cash payments will be made in secure electronic claims to allocated boxes of condoms, held in high-security condom vaults in the condom district of Zurich. And so on.

This is obviously ridiculous. But why? Why does the same analysis seem to make sense for gold, but no sense for condoms?

It's because we've ignored one factor: new production.

Let's step back for a moment and look at why people "invest" in gold in the first place. Obviously they expect its price to go up - in other words, they are speculating. But as we've seen, in the absence of investment the gold price would be determined only by industrial supply and demand, a fairly stable market. So why does the investment get started in the first place? Does it just somehow generate itself?

What's happening is that the word "investment" is concealing two separate motivations for buying gold.

One is speculation - a word that has negative associations in English, but is really just the normal entrepreneurial process that stabilizes any market by pushing it toward equilibrium.

The other is saving. We can define saving as the intertemporal transfer of wealth. A person saves when she owns valuable goods now, but wishes to enjoy their value later.

The saver has to decide what good to hold for whatever time she is saving across. Of course, the duration of saving may be, and generally is, unknown.

And of course, every saver has no choice but to be a speculator. The saver always wants to maximize her savings' value, as defined by the goods she actually intends to consume when she uses the savings. For example, if our saver is an American retiree living in Argentina, and intends to spend her savings on local products, her strategy will be to maximize the number of Argentine pesos she can trade her savings for.

Here are five points to understand about saving.

One is that since people will always want to shift value across time, there will always be saving. The level of pure entrepreneurial speculation in the world can vary arbitrarily. But saving is a human absolute.

Two is that savers need not be concerned at all with the direct personal utility of a medium of saving. Our example saver has little use for a big hunk of gold. Her plan is to exchange it for tango lessons and huge, delicious steaks.

Three is that from the saver's perspective, there is no artificial line between "money" and "non-money." Anything she can buy now and sell later can be used as a medium of saving. She may have to make two trades to spend her savings - for example, if our saver's medium of saving is a house, she has to trade the house for pesos, then the pesos for goods. If she saves directly in pesos, she only has to make one trade. And clearly trading costs, as in the case of a house, may be nontrivial. But she just factors this into her model of investment performance. There is no categorical distinction.

Four is that if any asset happens to work well as a medium of saving, it may attract a flow of savings that will distort the "natural" market valuation of that asset.

Five is that since there will always be saving, there will always be at least one asset whose price it distorts.

Let's see what happens when that asset is condoms. Suppose everyone in the world does adopt strategy C, just as in our earlier example they adopted strategy G. What will happen?

Just as we predicted with gold, there will be massive condom buying. Since condom manufacturers were not expecting their product to be used as a store of wealth, demand will vastly exceed supply. The price of condoms will skyrocket.

Strategy C looks like a self-fulfilling prophecy. Condoms will indeed become a costly and prized asset. And the first savers whose condom trades executed will see the purchasing power of their condom portfolios soar. This is a true condom boom.

Let's call this effect - the increase in price of a good because of its use as a medium of saving - "levitation."

Sadly, condom levitation is unsustainable. The price surge will stimulate manufacturers to action. Since there is no condom cartel - anyone can open a factory and start making condoms - the manufacturers have no hope of maintaining the levitated condom price. They will produce as many condoms as they can, as fast as possible, to cash in on the levitation premium.

Levitation, in other words, triggers inventory growth. Let's call the inventory growth of a levitated good "debasement." In a free condom market, debasement will counteract levitation completely. It will return the price of a condom to its cost of production (including risk-adjusted capital cost, aka profit). In the long run, there is no reason why anyone who wants condoms cannot have as many as he or she wants at production cost.

Of course, condom holders will realize quickly that their condoms are being debased. They will pull their savings out, probably well before debasement returns the price of a condom to the cost of producing one.

We can call the decrease in price of an asset due to the flow of savings out of it "delevitation." In our example, debasement causes delevitation, but it is not the only possible cause - savings can move between assets for any number of reasons. If savers sell their condoms to buy Google stock, the effect on the condom price is exactly the same.

Because condom debasement is inevitable, and will inevitably trigger delevitation, savers have a strong incentive to abandon strategy C. This means it is not a Nash equilibrium.

The whole sad story will end in a condom glut and a condom bust. The episode will be remembered as a condom bubble. In fact, if we replace condoms with tulips, this exact sequence of events happened in Holland in 1637.

So why won't it happen with gold?

The obvious difference is that gold is an element. Absent significant transmutation or extraterrestrial trade, the number of gold atoms on Earth is fixed. All humans can do is move them around for our own convenience - in other words, collect them. So we can call gold a "collectible."

Because it cannot be produced, the price of a collectible is arbitrary. It is just a consequence of the prices that people who want to own it assign to it. Obviously, the collectible will end up in the hands of those who value it highest.

Since the global bullion inventory is 150,000 tons, and 2500 tons are mined every year, it is easy to do a little division and calculate a current "debasement rate" of 1.66% for gold.

But this is wrong. Gold mining is not debasement in the same sense as condom production, which does not deplete any fixed supply of potential condoms. In fact, it only takes a mild idealization of reality to eliminate gold mining entirely.

Gold is mined from specific deposits, whose extent and extraction cost geologists can estimate in advance. In financial terms, gold "in the ground" can be modeled as a call option. Ownership of X ounces of unmined gold which will cost $Y per ounce to extract is equivalent to a right to buy X ounces of bullion at $Y per ounce.

Since this ownership right can be bought and sold, just as the ownership of bullion can, why bother to actually dig the gold up? In theory, it is just as valuable sitting where it is.

In the form of stock in mining companies which own the extraction rights, unmined gold competes with bullion for savings. Because a rising gold price makes previously uneconomic deposits profitable to mine - like options becoming "in the money" - the total value of all gold on earth does increase at a faster rate than the gold price. But the effect is not extreme. 2006 USGS figures show 30,000 tons of global gold reserves. This number would certainly increase with a much higher gold price - USGS reports 90,000 tons of currently uneconomic "reserve base" - but the gold inventory increase would be nowhere near proportional to the increase in price.

In practice, modeling unmined gold as options is too simple. Gold discovery and mining is a complex and political business. The important point is that rises in the gold price, even dramatic rises, propagate freely into the price of unmined gold and do not generate substantial surges of new gold. For example, the price of gold has more than doubled since 2001, but world gold production peaked in that year.

The result is that gold can still levitate stably. Even if new savings flow into gold stops entirely, debasement will be mild. The cyclic response typical of noncollectible commodities such as sugar (or condoms), or theoretical collectibles whose sources are not in practice scarce (such as aluminum) is unlikely.

Of course, if savings flow out of gold for their own reasons, it can trigger a self-reinforcing panic. Delevitation is not to be confused with debasement. Again, it is important to remember that debasement is not the only cause of delevitation.

What we have still not explained is why gold, which is clearly already levitated, should spontaneously tend to levitate more, rather than either staying in the same place or delevitating. Just because gold can levitate doesn't mean it will.

Money in the real world

In case it's not obvious, what we've just done is to put together a logical explanation of money, using gold as an example, and using only made-up terms like "collectible" and "levitation" to avoid the trap of defining money in terms of itself.

Now let's apply this theory to the money we use today - dollars, euros, and so on.

Today's official money is an "artificial collectible." Money production is limited by legal violence, not natural rarity. If in our condom example, the condom market was patrolled by a global condom mafia which got medieval with any unauthorized condom producers, it would resemble the market for official currency. No one can print Icelandic kronor in the Ukraine, Australian dollars in Pakistan, or Mexican pesos in Algeria.

It may be distasteful to hardcore libertarians, but this method of controlling the money supply is effective. There is minimal unlicensed production of new money - also known as counterfeiting.

It should also be clear from our discussion of gold that there is nothing, in principle, wrong with artificial paper money. The whole point of money is that its "real value" is irrelevant. In principle, an artificial money supply can be much more stable than a naturally restricted resource such as gold.

In practice, unfortunately, it has not worked out that way.

Artificial money is a political product. Its problems are political problems. It does no one any good to separate economic theory from political reality.

Governments have always had a bad habit of debasing their own monetary systems. Historically, every monetary system in which money creation was a state prerogative has seen debasement. Of course, no one in government is unaware that debasement causes problems, or that it does not create any real value. But it often trades off short-term solutions for long-term problems. The result is an addictive cycle that's hard to escape.

Most governments have figured out that it's a bad idea to just print new money and spend it. Adding new money directly to the government budget spreads it widely across the economy and drives rapid increases in consumer prices. Since government always rests on popular consent, all governments (democratic or not) are concerned with their own popularity. High consumer prices are rarely popular.

There is an English word that used to mean "debasement," whose meaning somehow changed, during a generally unpleasant period in history, to mean "increase in consumer prices," and has since come to mean "increase in consumer prices as measured, through a process whose opacity makes chocolate look transparent, by a nonpartisan agency whose objectivity is above any conceivable question, so of course we won't waste our time questioning it." The word begins with "i" and ends with "n." Because of its interesting political history, I prefer to avoid it.

It should be clear that what determines the value of money, for a completely artificial collectible with no industrial utility, is the levitation rate: the ratio of savings demand to monetary inventory. Increasing the monetary inventory has a predictable effect on this calculation. Consumer price increases are a symptom; debasement is the problem.

Debasement is always objectively equivalent to taxation. There is no objective difference between confiscating 10% of existing dollar inventory and giving it to X, and printing 11% of existing dollar inventory and giving it to X. The only subjective difference is the inertial psychological attachment to today's dollar prices, and this can easily be reset by renaming and redenominating the currency. Redenomination is generally used to remove embarrassing zeroes - for example, Turkey recently replaced each million old lira with one new lira - but there is no obstacle in principle to a 10% redenomination.

The advantage of debasement over confiscation is entirely in the public relations department. Debasement is the closest thing to the philosopher's stone of government, an invisible tax. In the 20th century, governments made impressive progress toward this old dream. It is no accident that their size and power grew so dramatically as well. If we imagine John F. Kennedy having to raise taxes to fund the space program, or George W. Bush doing the same to occupy Iraq, we imagine a different world.

The immediate political problem with debasement is that it shows up in rising consumer prices, as whoever has received the new money spends it. If we think of all markets as auction markets, like EBay, it should be clear how this happens.

Debasement and investment

We haven't even seen the most pernicious effect of debasement.

Debasement violates the whole point of money: storage of value. As such, it gives savers an incentive to find other assets to store their savings in.

In other words, debasement drives real investment. In a debasing monetary system, savers recognize that holding money is a loser. They look for other assets to buy.

The consensus among Americans today is that monetary savings instruments like passbook accounts, money market funds, or CDs are lame. The real returns are in stocks and housing. [Written in 2006]

When we debasement-adjust for M3, we see the reasons for this. Real non-monetary assets like stocks and housing are the only investments that have a chance of preserving wealth. Purely monetary savings are just losing value.

The financial and real estate industries, of course, love this. But that doesn't mean it's good for the rest of us.

The problem is that stocks and housing are more like condoms than they are like gold. When official currency is not a good store of store value, savings look for another outlet. Stocks and housing become slightly monetized. But the free market, though it cannot create new official currency or new gold, can create new stocks and new housing.

The result is a wave of bubbles with an unfortunate resemblance to our condom example. When stocks are extremely overvalued, as they were in 2000, one sign is a wave of dubious IPOs. When housing is overvalued, we see a rash of new condos. All this is just our old friend, debasement.

This debasement pressure answers one question we asked earlier: why should gold tend to levitate, rather than delevitate? Why is the feedback loop biased in the upward direction?

The answer is just that the same force is acting on gold as on stocks and housing. The market is searching for a new money. It will tend to increase the price of any asset that can store savings.

The difference between precious metals and stocks or housing is just our original thesis. Stocks and housing do not succeed as money. Holding all savings as stocks or housing is not a Nash equilibrium strategy. Holding savings as precious metals, as we've seen, is.

Presumably the market will eventually discover this. In fact, it brings us to our most interesting question: why hasn't it already? Why are precious metals still considered an unusual, fringe investment?

The politics of money

What I'm essentially claiming is that there's no such thing as a gold bubble.

This assertion may surprise people who remember 1980. But markets do not, in general, think. Most investors, even pros who control large pools of money, have a very weak understanding of economics. The version of economics taught in universities has been heavily influenced by political developments over the last century. And your average financial journalist understands finance about the way a cat understands astrophysics.

The result is that historically, the market has had no particular way to distinguish a managed delevitation from an inevitable bubble. Because of Volcker's victory, and the defeat of millions of investors who bet on a dollar collapse, the financial world spent the next twenty years assuming that there was some kind of fundamental cap on the gold price, despite the lack of any logical chain of reasoning that would predict any such thing.

Even now, there is no shortage of pro-gold writers who predict gold at $1000, $2000 or $3000 an ounce, as though they had some formula, like the P/E ratio for stocks, that computed a stable equilibrium at this level. Of course, they do not. They are only expressing their intuitive feeling that gold is very, very cheap right now, and tempering it with the desire to be taken seriously.

Gold's main weapon is one we alluded to already: a sudden, self-reinforcing, and complete collapse of the dollar. In a nutshell, the problem with the dollar is that it's brittle. When Volcker did his thing, the US was a net creditor nation with a balance-of-payments surplus. Its financial system was relatively small and stable. And it had much more control over the economic policies of its trading partners - the political relationship between the US and China is very different from the old US/Japanese tension.

For the Fed, what is really frightening is not a high gold price, but a rapid increase in the gold price. Momentum in gold is the logical precursor to a self-sustaining gold panic. If the US federal government was a perfectly executed and utterly malevolent conspiracy to dominate the world, let's face it. The world wouldn't stand a chance. In reality, it's neither. So a lot of things happen in the world that Washington doesn't want to see happen, and that it could easily prevent. Anticipating surprises is not its strength. [1]

Holy Cannoli, Batman! I think this is the longest "snip" I've ever used in a post. Nine pages in Word, just for that quote. And I even edited several pages out of it, "to tighten it up!" I hope you enjoyed it.

To recap, a rising gold price is evidence of increasing investment demand, which confirms the belief of those that already invested in gold that it was a good investment. And because investment demand is over and above the relatively stable industrial supply and demand dynamic, any new investment dollars must bid gold away from its current owners. And because saving in gold is a Nash Equilibrium, the price will rise very high. And because gold is THE monetary metal with the highest monetary to industrial use ratio, it will have no reason to fall back when it reaches its top.

And, as ANOTHER said, "So many people worldwide think of it as money, it tends to dry up as the price rises."

Stock, Flow, Supply and Demand

Let's try a little thought experiment and see where it leads us. This might be a bit of a mind bender and a challenge for me to articulate, but what the heck, we're already 11 pages into this thing. Why stop now?

Let's think of all the physical gold in the world in the same terms as our price discovery markets classify the gold they hold secure for private parties. (You do know that the gold for sale does not belong to the exchanges, don't you?) There is that gold which is "eligible" for delivery. And in our experiment this would be all the physical gold in the world. It is ALL "eligible" to be handed to someone else in exchange for something else. (The only requirement for eligibility in our thought experiment being that it is a physical object made of gold.) And then there is the gold that is actually "registered" for delivery. In our case this would be the gold that is up for sale or expected to go up soon.

So "eligible" is the "stock" and "registered" (for delivery) is the "flow," sort of. (Yes, I know that flow would mean the gold coming out of the ground and then being used up in jewelry and electronics if gold was like other commodities, but it's not, so get over it.)

Now what I just wrote is not entirely correct. You cannot simply compare stock to flow like that because they have different measuring units. Flow is measured in units/time and stock is just units. They do not and cannot compare. The only meaningful relationship they have is a ratio. Stock:Flow, or units/(units/time), which = time. This yields us a time value in which the flow will deplete the stock. So "our flow" is the amount of "registered" gold that actually gets delivered in exchange for something over a given time unit.

In the world as a whole, gold has the largest stock to flow ratio of any commodity, which is why it is unique. This means a very high time value for the depletion of gold stocks. In fact, it is an infinite time value since gold is not consumed, it is merely shuffled around until it ends up with those who value it most. So in our case we'll think of flow as delivery demands actually being met with "registered" stock over a period of time. And in this view, "stock to flow" is a dynamic system that is complicated by many factors.

One complication is that, today, physical and paper gold exist as "stock" at par with each other inside the system. And the flow of paper happens prior to the flow of physical stock (on the price discovery exchanges). In other words, price is discovered in paper and then delivery comes later. Price is not discovered at the physical delivery window. In fact, whether there is any physical at that window when you finally show up with your paper depends on dynamic changes that happened earlier.

As the paper flow precedes the physical flow, the supply and demand dynamics can change very fast, perhaps even so fast as to give the impression that they traveled faster than the speed of light like a tachyon, went back in time, and originated in the past! (Making them impossible to get out in front of!) As demand increases while registered gold is depleted and/or deregistered one of two things must happen. Either the price must skyrocket or the supply of paper must explode to take up the slack.

And as either of these things happen – or they both happen together – we end up with John Law's self-sustaining Misesian regression spiral. Where today's demand is determined by yesterday's performance. (We can call it "the tachyon effect" if you'd like.) This applies to both physical gold and paper gold, and the feedback loop will have separate effects on these separate elements of the market. It will be the cause of the separation and the result will be a flood of paper and no registered gold to service the delivery demand portion of it.

Ultimately the stock to flow ratio of physical gold will go inverse to that of paper gold. Infinite flow demand against zero registered stock. Zero time until physical depletion, concurrent with infinite time until paper depletion. At this point the price will have to go infinite and paper supply will separate because parity will no longer exist.

And in case you haven't noticed, we are now, apparently, at a novel stage in the game. The stage when it is becoming obvious to almost everyone that the Fed can do nothing but print more money (QE), and that it plans to do just that. I draw your attention to gold trading at $1,301 today as evidence! And regarding the Fed, what does a monkey with a hammer do? That's right. It hurts itself.

Being at this stage in the game right now, when clarity is spreading like wildfire, we can expect a further run up in the price of paper gold. Of course the price discovery market buys and sells paper gold so a move in either direction is possible in the short run, but the general trend in gold should now be obvious, even to monkeys. And don't forget that delivery of physical in this market is secondary, and only comes after price discovery occurs in paper.

So with this dynamic situation we find ourselves in, we should expect conflicting signals and responses in the gold market. The flow of gold should increase as demand from dollars pulls on the market. And the supply of gold bullion should be withdrawn or "deregistered" as the people holding it realize their investment belief has been confirmed.

From a demand perspective, flow should increase per the economic law of demand. And from a supply perspective, it should decrease. But how is this possible? Well, this is where price factors into the dynamics of the situation. In most commodities (and all other markets for that matter) flow would be measured in the weight of the good. "How many ounces are flowing?" But gold is a little different.

Because gold is behaving in this case primarily as a savings instrument, flow can be measured in the amount of savings being exchanged. Just like exchanging dollars for euros. In other words, to properly judge the flow we should look at the aggregate amount of wealth flowing "into" gold rather than the weight of gold changing hands. And in this view, the flow can increase with demand even as the stock is withdrawn. Price takes up the slack. It can even accommodate the shoeshine boy without threatening a top.

But there's another element in this dynamic situation that must be considered. And that is paper gold. As I said, price discovery occurs in paper only, and delivery comes after the fact. So paper supply creation can easily absorb the pressure of increasing demand while relieving price of its "taking up the slack" burden.

However, unless the ratio of physical stock "registered" to become flow rises along with the creation of new paper gold, well, "Houston, we've got a problem." And I'm talking about registered physical stock measured in weight, not value! Which is QUITE a problem!

Fortunately, to quote John Law (not the real one), there is no need to follow this challenging scenario further. Instead, we can just repeat ANOTHER's line once again:

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

In economic terms, ANOTHER was referring to gold's price inelasticity of supply here. In other words, gold seems to violate the economic law of supply. As the price rises, the supply dries up.

But another funny thing also happens when gold "tends to dry up as the price rises." Even more people join the "many people worldwide that think of it as money." And this means that gold violates the economic law of demand as well, delivering a positive price elasticity of demand. In other words, gold is a Veblen good. But unlike a Rolls or the Mona Lisa, gold is divisible and fungible making it the Veblen good that puts the common man on equal footing with the Giants!

This is what FOA meant:

In this world we all need much; blessings from above,,,,, family,,,, home,,, friends and good health. But after all that, one must have currency and an enduring, tradable wealth asset that places our footing in life on equal ground with the giants around us,,,,,, gold!

And this is how and why gold WILL accommodate even the shoeshine boy without collapsing!

There is no such thing as a physical gold bubble.

So, to wrap this beleaguered post up, let's just say that we have the distinct makings of a parity break between paper and physical gold in the works. The supply of paper gold must rise while the supply of physical is withdrawing (deregistering). The flow must also rise, at least in nominal terms, so the price will skyrocket to take up the slack. And as expanding paper competes with a rising price for the "slack taking-up" role, who do you think will win?

Could they each have their way? Could the price rise to take up the extra demand while supply contracts at the same time as easy paper dilution wins itself a lower price? Confused yet?

Well, this situation leaves us with an uncomfortable question. If the only price of gold we know today is the price of paper gold, what is going to happen to "the price of gold?" Will it skyrocket? Or will it plummet?

And if we apply the principles learned in John Law's amazingly long piece in a logical way to this uncomfortable predicament, we'll find ourselves at the conclusion that the true Nash Equilibrium is to take possession of physical gold. And, if you already have some, not to sell it while the price is rising OR falling (this time).

And with the supply of paper gold rising to meet demand while physical is being withdrawn, the only conclusion we can come to is that the gold buyers **IN SIZE** will have to stop buying from the price discovery marketplace because, if they do their due diligence, they'll clearly see that subsequent physical delivery has become impossible at the present price.

So, in conclusion, the price of gold will plummet!

That's right. At some point in the future, after the price of gold rockets upward, it will fall like a box of rocks! And right about that time you'll see more of Robert Prechter on CNBC than you ever thought was possible.

But here's the challenge. When the price of gold falls to $200 per ounce, try and get some physical. I'm sure that Kitco will sell you some from their pooled account. And GLD will be standing ready to sell you a share at $20. But just try to take delivery. I think you'll find it will be impossible at that point.

And that's why you've got to take delivery NOW, at the current "high" price of $1,300. Don't wait for the dip. Oh, yeah, the big dip is definitely coming. A **BIG** "correction." But will there be any physical available? Perhaps at $1,200 if you're really lucky. At $200? No way.

When I look into MY crystal ball, here is how I see a future gold price chart developing (roughly, of course):

And with that, I'll leave you with my replies to the email at the top:

My reply to email 1:
Is this an orderly bull market in paper gold or physical gold?

The bubble that "WILL come"... will it be in paper gold or physical gold?

Is there a difference between paper gold and physical gold?

Is your chart showing paper gold or physical gold?

My reply to email 2:
You may be right on stage 2. But my gut says that stage 3 is when it's obvious everyone's flooding into gold and the real physical **IN SIZE** decides its best move is to withdraw from delivery registration. At that point the paper market won't be able to handle the flood.

My bet, when the shoeshine boy tells you to buy gold he'll be talking about small gold coins only. GLD probably won't even exist anymore. And in this unique historical case, the shoeshine boy will not be the bad omen of a bubble top mania phase, but he will instead be the amazing bell-ringer of a new era. One in which even shoeshine boys can save their surplus wealth in gold. One I like to call Freegold. Because a physical-only gold market can actually handle everyone PLUS the shoeshine boy, unlike any other market.


[1] From Why the Global Financial System is About to Collapse
by John Law
Edited by me for length and content.


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Tyrone said...

Shoe shine? I prefer FreeGold Shine!


Unknown said...

Interesting projection FOFOA. I just wonder if I can survive my spouse's glaring disapproval as the paper price plummets to $200!? Of course I can point to this article to allay any concerns. ;-)

Something that kinda gnaws at me a bit has to do with the notion that the shoeshine boy will be able to get hold of some gold. Unless that is happening now, and I doubt it, where will that supply come from?

Quasimojo said...

Apart from the intriguing ideas expressed in this latest article, it is no small feat to begin and end an essay in so artfully and heartening a manner (with accompanying pictures echoing the sentiment). Beautifully done, FOFOA.

FOFOA said...

Hello Andrew,

What you have here is a reason to monetarily exchange your savings now rather than waiting for a "correction." You can thank me later.

As for how the shoeshine boy will be able to get hold of some gold, you can comprehend this, this and this and you will understand. Alternatively, you can just sit back and wait to see it with your own eyes. Then you will also understand, with much less wear and tear on your eyes.


Anonymous said...


I recently stumbled upon your blog.
Now the name Free Gold sounds very familiar to me but in another manner.
Have you knowledge of the term Free Money?
It is a currency proposed some hundered years ago by a Belgian economist Silvio Gesell. As a matter of fact it is exactly the same thing as the Free Gold propossed in your blog. Only instead of being used as storage of wealth like Free Gold, it acts as a currency only useful as medium of exchange.

Here is a quote from his book the "Natural Economic Order".
"And it is clear that money cannot be simultaneously the medium of exchange and the medium of saving - simultaneously spur and brake."

Another one:
"I therefore propose a complete separation of the medium of exchange from the medium of saving. All the commodities of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money ? Money was not made to be saved!"

Now his book is almost a hundred years old but is now more relevant then ever.
The quotes are from the following chapter of the webbook.

The full book can be read at.

Maybe you could give your oppinion on his theory's.

Misthos said...

FOFOA - I enjoy your blog. And you may be right.

But as for a potential drop in the gold price, I'm finding it difficult to accept. I will re-read your article again.

The current environment is one of global currency debasement. Surplus nations need to maintain a weak currency to be competitive for trade, and deficit nations need to maintain a weak currency for debt servicing. It's constant a race to the bottom, a reverse "currency race," as opposed to "arms race" so to speak. And when everyone is debasing their currencies - there is only on non-sovereign controlled form of money - gold to debase against. Gold will continue to be the beneficiary of global currency debasement.

Currencies and global banking will collapse and with them, global trade and amongst the chaos and distrust amongst nations, gold will be the int'l medium of exchange, not a fiat paper SDR. At that point, each nation will try one last time at inflating - and that inflation will be the new gold price. The market will only drive gold so far - and then Sovereigns get involved.

Come to think of it, I don't rule out gold confiscation.

Parag said...


I was thinking on this issue for some time now and always trying to justify why would one sell the gold when he is getting more confirmation on future economic destruction by rising gold price.

But many who are in much of ignorance of what we are discussing here may throw their position.

I am from India & here, all most all family rich or poor hold gold in good numbers.

Until now(10-15 years back)people are net savers. But now I am observe that local banks are running the advertisement for some time now about loaning cash against gold. Though this is nothing new but what is happening is earlier it was a scheme for really poor person who need cash for some social obligation but now it is targeting middle & higher middle class people.


Unknown said...

With regard to people like JOhn Paulson reportedly having billions invested in the etf gld, do you think that
a. he just doesn't understand
b. he may understand and he's just playing the runup in gld and will find a time to dump it.
c. whatever gold gld does have, he's planning a way to "get it for himself and not get screwed out of it".

Jeff said...

FOFOA, there is a new two part Jim Rickards interview where he puts forth a calculation leading to 40k price of gold. They are getting closer to your number.

miked said...

Hi FOFOA. From the previous thread. You said:

"Whenever you think you fixed something, the market will simply compensate for your fix and continue on its merry way. It's like FOA's river analogy. If you stand on a mountain top you can clearly see where the river is flowing. If you are standing right at the banks of the river you will be exposed to turbulence and swirling waters. You may be standing beside an eddy and your view may be that water can flow upstream. But in reality, the river only flows in one direction. Your perpetual motion machine is still just as impossible as it was in 1971. "

It isn't my perpetual motion machine :) If I thought it was do you think I would be reading your website?

I know something is going to give at some point. I am just trying to pinpoint how bad things are today. Your site is big on theory which is a fine thing, but how close are we really to the big day? We all feel it in our bones but so did FOA and ANOTHER 12 years ago. Some numbers are needed to quantify the risk.

I understand the difference between a stock and a flow. In fact I am an engineer so no need to expand on that. But This was my whole point - that daily flow figures from the LMBA say nothing about how much gold stands for delivery at any snapshot in time. Without knowing this number nobody can say how close we are to a delivery failure.

I argue that a snapshot of gold standing for delivery is extremely relevant because if a play/panic is made to call for delivery what matters is if the stock is adequate at that moment to meet the demand. If it is adequate, the system survives until the next attack is made. As you pointed out it needs to survive with ease or it will cause a panic run the following day.

The stock at Comex or any other paper gold supplier also includes lines of credit from the central banks, explicit or implicit. This is important.

Plain old commercial banks have maintained credibility for decades with a reserve ratio of 8%, so a Comex with this kind of ratio could also carry on until something spooks the market. But with the central banks terrified of a gold run it's very likely they would stand secretly behind a Comex default giving it the same air of safety that Northern Rock and other banks had once the government stepped in.

So what is my point? I am not trying to prove the system won't collapse. Of course it must, as all castles built in the air do. I am just asking a simple question. How close are we now? And can that be backed up with some numbers?

costata said...


"But as for a potential drop in the gold price, I'm finding it difficult to accept."

FOFOA isn't arguing for a huge potential drop in the price of physical gold. He's suggesting that the paper price of gold could display a paper price (much lower) than the realisable price of actual physical gold.

An observable, tangible divergence between perception and reality.

costata said...


I haven't read any of the writings of the author you quote. My gut reaction was that his insights were visionary for his time.

Consider this. At the time that Gesell wrote these words gold (and silver) were still money in most parts of the world, if not legal tender.

You could easily restate his words as an argument for the separation of the role of gold (money) then both medium of exchange and store of wealth. Gold as the store of value while:

"Money was not made to be saved!"

I agree that he seems to be describing Freegold with gold as the savings vehicle and the role of medium of exchange fulfilled by something else; perhaps the legal tender, paper money.

miked said...


To follow up on your reply from the last thread. You said:

"Whenever you think you fixed something, the market will simply compensate for your fix and continue on its merry way. It's like FOA's river analogy. If you stand on a mountain top you can clearly see where the river is flowing. If you are standing right at the banks of the river you will be exposed to turbulence and swirling waters. You may be standing beside an eddy and your view may be that water can flow upstream. But in reality, the river only flows in one direction. Your perpetual motion machine is still just as impossible as it was in 1971. "

It's not my perpetual motion machine :) If it was do you think I wold be reading your website?

As an engineer, I understand the difference between a stock and a flow. I argue the stock (snapshot) is extremely relevant.... both the stock of paper and the stock of physical gold backing it. As you pointed out the degree of panic dictates how much paper will ask for delivery. Surely a panic situation only develops of there is a near miss damaging confidence? Retail banks exist quite happily on an 8% reserve ratio. Why can't the Comex? (Don't get me wrong, I think it's disgusting that the Comex doesn't back all it's paper with physical but opinions don't matter). There is also implicit backing for the paper gold market from Central Banks. We have all seen the rumours of secret EU support for banks when gold delivery was impossible.

At least in my view, call it simplistic if you wish, an all-out default won't happen until the central banks balk at the cost of supporting a paper delivery. You asked if this would be a good use of CB gold. I argue that the alternative of a paper default would be far worse. That would cause an immediate run on all paper gold and an all out financial markets meltdown which you have so eloquently outlined. Therefore I expect CBs to defend paper gold almost to the death.

I don't wish to disprove your theory. I agree it is the end game. All castles built in the air collapse, and the longer they have been suspended in the air the harder they fall.

What I am saying is without numbers it's extremely difficult to say if the end is near or not. Harvey Organ does is best to anticipate a Comex default but I don't think it will be possible to predict by looking at their own reserves.

Anonymous said...


"I agree that he seems to be describing Freegold with gold as the savings vehicle and the role of medium of exchange fulfilled by something else; perhaps the legal tender, paper money."

That was exactly the thing he aimed for, he proposed to do this by creating, like Gresham's Law states, "bad money".
In the fact that the paper money which would be used as medium of exchange lost its face value over a course of time.
So if you would try to keep a certain amount of bills out of circulation after a while the value of those bills would be less then when you had them for the first time.

This way the storage of value and the medium of exchange are truly seperated.

Radek said...


You are scary in your ability to understand an average investor. I read your post and I feel like you are reading me like an open book. 100% right on people looking for saving methods that retain value. Many people have been burnt in stocks (Nasdaq), many in real estate, soon many in bonds. The smart ones have already discovered the only impossible to debase method of saving.

If I can make suggestions. You should make a questionnaire at posts like this to ask people questions and see what their answer. Peoples answer will be a confirmation of your statements about people behavior, incentives, plans, etc.

I buy physical and I hold it (not sold even a single ounce). I keep moving into physical and avoiding paper gold for a mile.

I enjoyed it. Thank you for your very interesting insights.


P.S. Why strategy C? ;). You did not take into account that wealth effect will make people use more of C stuff this offseting the ongoing debasement efforts :).

Anonymous said...

FOFOA, another beautifully written essay.

I know you don't like to speculate on what you refer to as sub-macro micro-trends, but it appears to me there is one critical flaw in your analysis.

Let us assume for arguments sake that you are 100% correct. In fact, I will go so far as to state I believe you will be proven 100% correct.

Now let us ask this question: what happens to gold holders when gold reaches/surpasses $50,000/oz?

If you are true to form, will you merely suggest that this is not your purview? Having performed a very important function of warning others, and having been proven more than right, would it now be time to ride off into the sunset?

But what about the reality of the environment gold holders will find themselves when your projections come true? Like nuclear weapons, radar, etc, how does one actually use such a powerful weapon/tool without suffering blow-back and/or revealing their own vulnerabilities?

I guess what I'm driving at is if one were to hold even relatively modest amounts of gold in an economic environment where fiat has collapsed, once revealed (ie used for food, shelter, fuel, etc), thereafter they would be at tremendous personal risk.

And it doesn't mean the gold has to be buried in the backyard. Even if it's securely stored in an off-site vault, once one is known to have such a valuable asset, then kidnapping, extortion, etc all become tools of others seeking to acquire the wealth store for themselves.

If this were the case, then wouldn't the best course of action be a social investment? For example, every time gold took another shot upwards, one would take their savings and hold a big community gathering in order to inculcate friendship & camaraderie?

Of, the alternative would be, spend one-half your money on gold, and the other half on developing a security network. Because as this crises unfolds, and you are proven right, there are a whole host of other issues that will come into play that have nothing to do with esoteric discussions of wealth preservation.

Strelnikov said...

Always enjoy your analysis. Can you explain in simple terms how to read your final chart? Just pretend I don't know anything. That should be safe.

costata said...


In your last comment you described most of the nascent or realised security issues that confront every high wealth person on this planet, right now.

How will those issues be addressed in a Freegold environment? IMHO probably the same way.

Pete said...

This post was so good it brought a tear to my eye. The very first person to provide an appropriate answer to a burning question I had regarding gold's rise.

Thank you!

- Pete

Misthos said...

@ costata


Anonymous said...

@Costata said "You described the security issues that confront every high wealth person. How will those issues be addressed in a Freegold environment? IMHO probably the same way."

Exactly. And perhaps this is where FOFOA says, "thanks guys, but please take it elsewhere".

I mean, once you "get" the primary underlying thesis, then what further use does the blog serve other than to marvel at a pseudonymous blogger's writing ability?

Or does FOFOA wish to retain his 'graduating' students in such a way as to possibly help out with newly arrived undergrads who are being exposed to this level of analytical thinking for the very first time?

Like most post-grad environments, aids are allowed to privately discuss higher-level constructs, but most/all of it is supposed to be kept out of the classroom as to not scare off the newbies.

For instance, what happens to a regular middle-class shmoo who likes to hang out with friends, drink beer and watch football, but who at the same time has been diligently following FOFOA's advice, and now finds himself in the unfamiliar position of being an envied "rich guy"?

Would a regular middle-class person really want to have this new found 'status' (and the personal risk that comes with it)? Or, wouldn't they rather have access to the core means of civilization (food, shelter & clothing), while still being part of a kinship group with all the attendant social benefits?

In some ways, this is a similar line of thought that Michelle Foss (Stoneleigh) advocates in terms of the advantages of a owning a small farm in a tight community setting.

Like I said above, FG is like owning a nuclear weapon. Can you really use it without putting yourself at risk?

Unknown said...

Hello FOFOA,

If further paper dilution means higher future physical purchasing power, then one is naturally led to believe the BIS will announce a buy/sell spread using knowledge of total claims the moment before the collapse of paper price.

Somehow, the BIS and the major private gold holders know the total claims, as does Another. The Euro group is going to force those claims into real bids instead of just claims! - FOA

Do you think the announcement will use the purchasing power of euro at that same moment?

I think you mentioned somewhere (correct me if I am wrong) something about 2007 dollars, but it seems to me there has been slight (read: significant) debasement since then.

Of course, this will probably happen after US hyperinflation because they don't want to be seen as dollar destroyers, so I don't know how US pricing will work.

Not that it matters much. I will take your silence as being unimpressed. ;)

BTW, this might be of interest to you.

miked said...

"Like I said above, FG is like owning a nuclear weapon. Can you really use it without putting yourself at risk?"

Feel free to buy 1 gram bars Snerfling. In spending those you will not have conspicuous wealth.

The world will not stay in chaos for ever. If you are very wealthy you can keep your gold buried at your farm until you feel safe to spend it.

Dave Narby said...


Hmm... Fofoa, you might want to trademark (TM) Freegold!

Anonymous said...

@MikeD said "Spending 1 gram bars will not (reveal) conspicuous wealth. The world will not stay in chaos for ever. You can keep your gold buried at your farm until you feel safe to spend it."

Mike, recall what FOFOA said on a prior thread in response to Texan's opinion regarding the government's ability to gate accounts in order to stem capital flight:

FOFOA said "I think you are all giving the US government far too much credit considering it is about to lose its golden goose. You are describing the present situation of the federal government and projecting its present abilities into a future without the dollar. A ludicrous projection! What you think of as the big domineering federal government is nothing without public confidence in its currency, the physical dollar. And confidence is one thing it CANNOT force."

I don't think I'm mis-characterizing these comments to observe that many things will change, amongst them:
- say good-bye to America's overseas military empire & control of oil
- say good-bye to our domestic social safety net
- say good-bye to our existing security/justice system

Now, in previously documented post-empire collapses, how have societies typically organized themselves? Warlords, clans, kinship groups, etc.

In this type of environment, what you believe to be an inconspicuous use of 1 gram of gold will be picked up by spies and turncoats who will be compensated for reporting **all** gold transactions, no matter how small. It will be up to others higher-up the chain of command to follow-up and determine if it was a one-time affair or if there's more.

Sure, you could bury it, but for how long? Have you ever seen/experienced tribal warfare? What if your zone fell into the hands of others? How would you ever get back? (Ask Cypriot Greeks who have never been able to return to N Cyprus in nearly 40 years.)

The only issue I have with FOFOA's spot-on analysis is that it fails to account for what really happens in a FG world. He can predict an ineffective government to support his thesis regarding a weak fiat currency (as he did in response to Texan), but then what happens when you have a weak/non-existent government?

Mike said...

i have read about the contract price crash several times from another, foa and fofoa.

here is my extra take on it...
my guess is this will happen very quickly. as gold goes sub 1000 we will see all the deflationists saying i told you so.
but they too will realize that it is difficult to get gold in their hands in large amounts.

i think once the OI starts crashing down it will happen in no more then a month's time until the contract market is shut down and the physical price starts being discovered by the BIS for the Euro.

the comex is not taking supply from their inventories (dealer) for their longs which just happens to be plentiful on paper but instead using customer inventories (allocated) with paper premium to satisfy the longs in this market.
shifting gold in one hand to another like a game of poker where the supply is the same.

once those allocated holders stop having their gold except dollars, that is when you will see the OI fall and fall it will quickly as delivery becomes impossible.

i don't see the CB's intervening anymore to help with the supply issues once the allocated holders stop leasing.

But i see the OI going up much higher for gold maybe 700k-800k before this all starts happening.

Dave Narby said...

With regards to FOFOA's gold price projections, I managed to find yet another way to come near those numbers:

When you look at gold and gold mining stocks as a percentage of global assets during times of financial stress, you will find that they are typically around 26%, and currently at 0.8%

That means in order for gold to reach historical averages, gold must go up by a factor of 32.5, which puts the POG at $42250/oz.

This however assumes that the price of gold follows the law of supply and demand exactly, and assuming they stop flooding the market with liquidity, etc. I expect those to factor in and drive the price higher than $42250, but I have no way of proving or calculating, it's just a 'hunch' : p.

When this happens, I doubt much if any gold will be for sale at that price. I suspect though, that those with gold will be able to swap it for expensive cars, boats, houses etc. (but I think you will need some silver to buy groceries from your local farmer).

miked said...

Hello Snerfling

FOFOA's has never been a political blog, apart from to anticipate the way politicians would react to monetary events. If you want to discuss the aftermath of Freegold you might want to try He does several kinds of scenario analysis to attempt to anticipate what life might be like.

Personally I don't believe in a political Armageddon. I have lived in East Europe for some time and I have seen how life transitioned for them after their communist world came to an end. To be sure there was a lot of Mafia domination in the early days but everything was very disorganized. It would have been easy to slip through the net. The Mafia were eventually legitimized or squeezed out and things these days are fairly normal.

Edwardo said...

FOFOA wrote:

"Since there is no condom cartel - anyone can open a factory and start making condoms - the manufacturers have no hope of maintaining the levitated condom price."

Pardon the minor quibble, but as soon as it becomes apparent that the market will be awash with mom and pop condom concerns, barriers to entry will be, pardon the use of the following word, erected by those already in the business of condom production. Free condoms (or some other trinkets of value) will be funneled to lawmakers who will then see to it that the old line condom maker's lucrative business is, ahem, protected. Of course the motives proffered for doing so will be along the lines of "safety", but that will merely be the good reason, not the real reason, for creation of the new legislation.

Unknown said...

@ FreeM...

I have read Gesell as well. The concept of demurrage is not new and has been used in the real world with varying success. But how to implement such a system in this modern (global) world? It would seem that we need an element with anti-gold properties; something that is inherently NOT stable over time to discourage hoarding (as opposed to saving using gold) such a currency. It needs to be transmutable with declining value over time as you have indicated. I believe we have such a thing: radioactive elements that decay over time. The rate of decay is dictated by nature, not man, as are the qualities of gold. Imagine a plastic card containing a fixed amount of a decaying element (just need a Geiger counter at the cash register). Once the element has decayed to the limit of detection, the currency becomes useless encouraging its self-liquidation by returning it to the originator for the return of some prorated amount of deposit left with the originator when the charged card was originally purchased. The discount value is dictated by the detectible radioactivity. To boot, since we have different radioactive elements with different rates of decay, it would be entirely possible to set up various discount rates to match risk and creditworthiness. Technology involved in creating, and concentrating such elements creates a barrier of entry that could prevent the biggest problem that so many ‘medium of exchange’ currencies suffer: counterfeiting. Select radioactive elements might be no more easily be created than gold itself. Thus, we could separate and mate the best store of value with the best medium of exchange our natural world has to offer to encourage human action.

The Final Straw said...


Brilliant post. I have a few follow-up questions if you don't mind indulging me. Once the price of paper gold collapses, what will serve as a price discovery mechanism? How will the holders of physical gold know how to value their gold against other goods? How long do you think it will take before a physical gold starts to flow again?

Robert Mix said...

Awesome, awesome post FOFOA. I tried to comment earlier today, but got zapped by an error. Tried to get in again, another error.

Then I went to check my email, and my cousin Bill wrote me that FOFOA's new article is the Lead Story at!!! Fame (and hopefully and deservedly) fortune for FOFOA! There are already 167 replies. You have a lot of fans over at zerohedge, but you already know that.

You, sir, are adding a lot of value to all of us wanting to protect ourselves from financial disaster.

And while I may sell some of my gold on its way up to $55,000 (first sale for a containerload of Japanese & Korean bearings and second sale to BUY ALL OUR COMPETITORS in Peru!), I will closely be watching. And buying gold again on Monday.

Gold Babiez!

Fantastic day for you FOFOA! You deserve it!

Anonymous said...

Methink so too!
Saturday evening delectation!

Unknown said...

Hello all,

I've read some of Another's, FOAs from USAGOLD forums a couple years back and now FOFOAs posts for about a year and I sure have learned from them and all posters as well, thanks.

@MikeD, "...Therefore I expect CBs to defend paper gold almost to the death." ...And that's precisely what they're doing and will continue until such event. See, as I understand and as FOFOA has been describing with his Freegold thesis and the only foreseeable way it can unfold, it's the final result that matters, the only possible conclusion to this mess if one understands Freegold. Doesn't matter the struggle and unpredictable specific events that will eventually develop into the same outcome (we may think of that process as a black box), but what really matters is to hold on to physical gold, especially when the paper price plummets and NOW before it is too late.

Now, as far as how paper and physical will diverge, I understand the paper price may continue to go higher as demand keeps increasing but that simultaneously will continue to dry-up the physical, depleting BBs and CBs down to a level where they won't be willing to let go more, as paper price and risk among other factors become unbearable (the max pain they can take before they cover up). And they will know this when the LBMA and COMEX start to settle in delivery contracts for cash and physical bullion is almost gone from BBs. At that moment it'll be basically a paper gold game and the **IN SIZE** players (insiders) will be the first to notice when this comes, that the house of cards has no more foundation and as FOFOA mentions will be the last "to withdraw from delivery registration."

So, from that point in time the paper gold price will have plummeted and physical will have practically disappeared from the market place, except for a few who may panic and let go to their precious position. The rest we can only speculate for many other chain reaction unpredictable events across the globe that will be felt, such as USD collapse among other currencies devaluations, paper assets meltdown in the process, i.e. stocks, OTC derivatives, futures, swaps, banks, financials, etc., etc., etc., and as we may wish to further speculate a new reset, except for a few strong currencies, countries, all physical assets and productivity infrastructures that may tumble prior to a fresh start of the world economy, whatever this may be.

But, we know this kind of speculation is not on the scope and interest of FOFOAs Blog as he has mention to us before. So again, all that really matters is to understand that Freegold as store of value at REAL market prices is inevitable, based on the current situation our governments and banksters have put the us and the world economy in. Hence, to hold PHYSICAL Gold is the most important thing to do as a store of value and very possibly for a significant transfer of wealth, which will be confirmed once the BIS has to find a new price for physical gold (that would be the actual split from the paper gold price) as all this has been mentioned in this blog, so the ECB can mark-to-market its balance sheet and support the Euro.

As you say how to know "if the end is near or not", but we can all feel is not either that far...

Best Regards.

themagicbusguy said...

Thanks again for your insight. Would you care to speak to silver's role in the Free Gold? Thanks again.
Regards, The Magic Bus Guy

costata said...


With this post you prompted me to revisit a conversation with my wife about paper gold prices vs the value of our physical gold.

I wanted to be totally sure that she was prepared for the divergence. We may have to calm an anxious son or two who read that the "price" of gold has crashed and fear that their mother has "lost" a fortune.

I'm now fully confident that we will sail through the paper crash without angst.

Thank you once again for your outstanding work.

Unknown said...

FOFOA; thanks for the links, that'll only take me a month or so to read through. :-) Or as you suggest, I will stay tuned.

I believe it will be interesting to see how many people cough up their supply during the price drop you envision. I know I will be at my local coin shop, fiat in hand, hoping to collect some of those bargains.

It is funny (in a macabre kind of way) how psychology works in regard to transformational markets (bull, freegold, etc...). I have been with this for over 10 years and can wait another 10 if necessary to reap the rewards of patience and due diligence. Thanks for illuminating the path.

Edwardo said...

"Would a regular middle-class person really want to have this new found 'status' (and the personal risk that comes with it)? Or, wouldn't they rather have access to the core means of civilization (food, shelter & clothing), while still being part of a kinship group with all the attendant social benefits?"

What class do you think all the people who play the lottery come from?

amanfromMars said...

Thanks for the MasterClass, FOFOA.

The whole System is a house of cards with edifices built upon swamps with no base and/or anchor in a sea of shifting sands.

And Nash wasn't wrong to realise IT a Great Game for Life which we can only just Theorise about with regard to the Past and the Beginning of the Future, which is the only thing we can create with our Thoughts to Change and Driver the Present.

Words and Ideas Shared Freely Power Controls and Control Power.

Dave Narby said...

I just had a possible epiphany.

When Soros says "Gold is the ultimate bubble", he isn't saying that gold will be the biggest bubble.

After all, he's Hungarian, which means English is his second (probably third or fourth) language. So instead of using "ultimate" in the sense it's typically used in the USA, e.g.

a. Of the greatest possible size or significance; maximum: Has the ultimate diamond been found?
b. Representing or exhibiting the greatest possible development or sophistication: the ultimate bicycle.
c. Utmost; extreme: the ultimate insult.

...He's properly using the first definition of "ultimate":

1. Being last in a series, process, or progression.

He's saying the bubble in gold will be the LAST bubble.

IOW, all the fiat in the world will flow into gold at the end, creating the great mother bubble of all paper into gold, which when it bursts, will result in the end of all fiat schemes... Because by then the peoples of the world will be aware of that game, and reject it.

It's already happening.

miked said...

Hello Dave

Yes I thought the same when Soros said it. It's a nuanced difference in meaning but with a huge difference in the intended result.

You can just see historians looking back in posterity with references to Soros like they were making to Joe Kennedy's shoeshine boy.

costata said...


"...... creating the great mother bubble of all paper into gold, which when it bursts, will result in the end of all fiat schemes... Because by then the peoples of the world will be aware of that game, and reject it."

Look at it this way:
"...... creating the great mother bubble of all paper into gold, which when it bursts, will result in the rejection of fiat as a store of value..."

After the Freegold revaluation fiat currency will function even BETTER as a medium of exchange than it does now because it will be dynamically marked-to-market through a floating, freemarket value in gold.

This is a key part of the overall Euro Freegold architecture that A/FOA and FOFOA have described so exhaustively.

Another and FOA explained that a total rejection of fiat would be a disaster for the international monetary/financial system and world trade. The Euro Freegold approach was designed to avoid this outcome (and war) when the $IMFS inevitably failed. It provides a viable alternative template that ALL fiat currency systems can transition to over time.

If you want further evidence that fiat is not going away take a look at Zimbabwe. They stopped issuing the Zim$ and legalised the use of other fiat currencies because the populace had ALREADY adopted these alternative fiat currencies spontaneously in response to the hyper-inflation of the Zim$.

teki said...

There are plenty of physical exchanges throughout the world. Anyone who has been to India, UAE or a local pawn shop knows what I am talking about. Price discovery takes place at these exchanges everyday.

Gold Price discovery also takes place on the paper markets. These markets (if you read the fine print) provide the ability to settle in paper at the whim of the exchange management.Want physical delivery ask former Goldcorp Rob McEwen what happens when you ask for delivery on a sizable order (40,000 ounces).This is old, well known news. Anyone who is anyone knows it, which is why a serious player like the PRC doesn't bother to show up. This paper market fulfills the important role of providing a place where people can gamble on the price of gold. Plenty of people love going to Vegas. With the paper settlement clause in the contract I fail to see how the Comex could fail. It's like saying that Vegas will fail if the wrong team wins the super-bowl.

If the physical market separates from the paper market even a tiny bit, plenty of people will want to leverage and place bets in the paper markets. They don't want the gold, they just want the ability to profit from the price change. They are happy to get a paper pay off on a paper bet, just like the contract allows. 10 years ago, yes the two markets could separate and stay separated. Now days, all the serious players have long excited the Comex. The management is happy to take whatever bets come along including short sales from government agents. The price will rise and fall to whatever view of reality dominates at the moment.

Think the Comex is at risk because to many players are going broke because of limit up days - no problem - can you spell bailout. Think that the government can't raise the capital to do so? Think the US federal government gets money by selling bonds and collecting taxes? Think again. The money is deposited first in whatever amount is budgeted by law, then the successful oversubscribed auction takes place because it's a sure fire opportunity for the primary dealers to take a skim off the float. Now days taxes only cover 1/2 of the budget and of the remaining 1/2 only 1/3 of the bond sales come from plausible sources. China is down 91 billion so far this year and American's generally don't save and when they do save a bit like now, the numbers are just way out of line with what is being sold at the auctions. When the US goes to war, do you think that they wait for a successful bond auction where China needs to show up before starting? Kind of a silly idea isn't it.

Want small amounts of physical, go to Dubai. Placed a bet at the Comex and thought you could get big time physical, tough luck, you should have read the contract. The price of paper gold going down because paper contracts can't deliver physical made sense years ago. Now days, dollars can be conjured in any amounts that the political will of the Treasury desires. The paper dollars will pay off paper contracts, with no need for significant price discontinuity.

Desperado said...


In the last thread you said: "Marc Faber's recent comments indicating the Swiss are likely to force government purchases of gold stored at banks... Unfortunately Faber wasn't speaking of voluntary purchases."

Here is the juicy part:

Faber cautioned physical gold holding in the U.S. and Switzerland were subject to the possibility — considered remote by mainstream observers — of forced sales to the government. Precious metals investments held in the Hong Kong or Singapore banks were safer, as these jurisdictions, influenced by China, were likely to resist U.S. political pressure on individual investors, Faber said.

Marketwatch is very US centric, and I think Faber's comments may well have been aimed at US investors, who have a completely different set of problems from most of the rest of the world (ie. that US holders of gold in Switzerland would be forced to cough it up). To force the Swiss people to turn over their gold would require breaching the constitution and numerous laws including bank secrecy. Unless the existence of an existential threat was there and the people turned over power to some dictator, this would not happen. But I do agree that there is always a certain degree of political risk, and that is why having your gold physically in more than one jurisdiction is a good risk diversification strategy, and Asia would be outside of the US sphere of financial control.

The largest area of political risk to Switzerland stems from the 2 TBTF Swiss banks. Her is my perspective on this political risk.

Both CS and UBS have fallen under the influence if not control of the UK/US $IMFS (as Fofoa puts it). UBS in particular was emasculated by the IRS and forced to go begging to the Swiss government for permission to divulge account informations and also a CHF30B bailout. UBS was the recipient of $4B in the AIG CDS bailout and also suffered legal setbacks in penalties and losses in the auction rate securities market. In the last 2 years UBS CEO Grubel (ex CS CEO) has declared that the US investment arm would be the focus of the return to profitability. At the same time, Wolf, the head of UBS Americas is a close golfing pal of Obama and he and his kids even play basketball with him. The UBS lawyers in the US also made major inroads in plum management positions across the banks and especially in the areas of compliance and risk control. CS has also remained very US centric.


Desperado said...


45% of the SNB stock is "privately owned". I would be willing to bet that CS and UBS each both outright own or have control over at least a few percent of the SNB stock. But also through their close contacts with the Cantonal Banks, some of whom are also partially privately owned (UBS and CS are surely minority shareholders here, too) , UBS and CS have enormous influence if not partial control of most aspects of Swiss financial policy.

So it would appear that the $IMFS have extended their control into the Swiss TBTF's, and so also into the SNB and Swiss politics. As a Swiss citizen, I consider this to currently be the biggest risk to Switzerland.

One area of interest if Switzerland comes under some kind of pressure to disgorge it's gold would be the ZKB gold ETF. It is audited by gold bar number and can be redeemed in LBMA gold bars. It was originally set up as a legal way for Swiss insurance companies to own gold, and I doubt the people would like the banks plundering this fund to pay off their debts any more that the Icelanders did. And the people are smarter now.

We also have all those pesky CHF based loans to eastern Europe made, apparently through Austrian banks through repo/swap agreements. I found this chart of the SNB's reserves where "claims from Swiss Franc Repo transactions" is of interest, it is bigger than the gold reserves. Is this the other side of those CHF loans to Hungary and Poland or just a hangover from the currency interventions? Also, FX reserves dwarf the gold reserves. So there certainly is some political risk here as well.

So Switzerland is not risk free, but I wouldn't consider it riskier than Asia.

On a final note in regards to your comment: "FOFOA's has never been a political blog, apart from to anticipate the way politicians would react to monetary events. If you want to discuss the aftermath of Freegold". In a previous thread Fofo said this: "In the meantime, I am done debating these complex micro scenarios. I will consider them all silently but I will not waste my time responding". Fofoa never said don't post about the aftermath. I personally detest censorship, and I think that we should let Fofoa decide if a comment is outside of what he wants. By all means, practice self censorship, we all do anyway. But you telling others what they should or should not post should be reserved for Fofoa unless he officially designates some one as blog-policeman. For instance, I would love to hear more about whatever Eastern European country you live in. I have traveled several times through Poland, CR, Slovakia, Romania, Bulgaria and find it fascinating and would love to hear about any gold related observations you might have.

miked said...

Hello Desperado

"Faber told a CLSA Investors’ Forum 2010 in Hong Kong. "

I know it was reported in Marketwatch but as you can see he was not speaking to a US audience.

I believe you that Switzerland has all kinds of protections about that but they did pussy out to US demands for tax information, and this was previously sacred. If Faber said it there must be a reason. I haven't known him to make stuff up.

miked said...

Hello Teki

"The price of paper gold going down because paper contracts can't deliver physical made sense years ago. Now days, dollars can be conjured in any amounts that the political will of the Treasury desires. The paper dollars will pay off paper contracts, with no need for significant price discontinuity."

Perhaps you could fill me in? Are you speaking about gold form the dealer or also allocated gold? I would be pretty upset if I had bought allocated gold and it was settled in cash.

There are all kinds of paper markets. Some paper markets never promise delivery at all. For example the CFD/Spread betting market. I wouldn't expect these paper markets to fall when delivery becomes difficult. Why would they?

Tekin said...

Dear teki;

Rather than gambling on the possibility of price continuity, is it not safer to buy physical now and stop worrying about the future developments?

Truly Free said...


Love the blog. I find it quite interesting.
I have a couple questions for yourself or the community at large however.

First - everyone seems to trash "paper gold" - But I'm not 100% sure what the definition of "paper gold" is.

I understand that options to buy on the COMEX are "paper" - but certain ETF's (e.g. GLD and SGOL) have actual physical gold in a vault where the investors are the the owners of that gold. How is this real gold in a vault "paper"? Options that can't be filled are one thing - physical in a vault is something else. What am I missing here?

Moving on. Some of us are caught in the world of trying to preserve purchasing power in an IRA. I am unaware of any means of owning physical gold in an IRA outside of ETF's such as GLD or SGOL. Let me be clear - I love the idea of personally owning physical - but what if that simply isn't possible because it's tied up in an IRA? I would love suggestions.

geoff said...

This blog pushes my grey matter beyond its capabilities but I keep plugging away in an effort to understand.
Given the content of FOFOA's latest thesis, would gold mining stocks not act like a traded option on gold? Taking on board the geopolitical and corporate risks in stock picking, won't gold stocks with substantial, underground and proven gold reserves magnify any movement in the gold price?

Unknown said...

I also would like to know your take on whether there is still any gold left in fort knox.

Unknown said...

Where do I find Rikards latest interview?

Indenture said...


Trust me when I say that you Cannot Redeem Shares Of GLD for Physical Gold. You could sell your shares of GLD and with the dollars buy physical but GLD will not send you physical in exchange for your shares. Period. So, GLD is Paper Gold.

Moe: I believe the answer concerning Fort Knox is it doesn't matter until the doors are opened and we learn one way or the other. As is, Schrodinger's Golden Cat will remain in the box.

Mike said...

interesting headline from the Saudi's. Another says that Gold and Oil flow in opposite directions and that the contract market for gold was designed for the Saudi's to obtain gold at cost price but for the Saudi's to never unveil what they really had for this trade.

best quote is here

"We did not buy new gold. This was just a merge and reclassifying assets. This gold was under different accounts and was brought under one account,' Muhammad al-Jasser told Reuters, declining to give more details.

anything to do with what Another said?
Would like to see your comments on this FOFOA.

Saudi 'Did Not Buy New Gold Reserves in 2010'

From Reuters
via Trade Arabia, Manama, Bahrain
Sunday, September 26, 2010

RIYADH, Saudi Arabia -- Saudi Arabia did not buy new gold reserves in 2010 despite data from the World Gold Council that showed the kingdom had doubled its reserves during the first quarter, the central bank governor said on Sunday.

"We did not buy new gold. This was just a merge and reclassifying assets. This gold was under different accounts and was brought under one account,' Muhammad al-Jasser told Reuters, declining to give more details.

In June, the WGC data indicated that Saudi Arabia lifted its reported reserves to 322.9 tonnes from 143 tonnes, making it the world's 16th largest holder of gold.

Gold prices have risen more than 15 per cent this year to record highs as concern over sovereign and financial market risk, low interest rates and fears of inflation further down the line boosted investment in the precious metal.

Mike said...

i wonder how much more they are hiding in their other accounts :P
322 mt for all this oil they have given the world all these years is laughable.
maybe they have 8000 mt worth hehe.

I would guess that the Saudi's have the most gold in the world unofficially

miked said...

Yes Mike I posted about this some months ago.

We are assuming that official reserves are the whole story but who is delivering the oil?

Its yearly production of only crude oil neared 3.4 billion barrels (540,000,000 m3) and it managed over 100 oil and gas fields in Saudi Arabia totaling at least 264 billion barrels (4.20×1010 m3) of oil reserves and 253 quadrillion scf of gas reserves

This is not the Saudi central bank although it is a government institution. Who is to say how much gold is in Saudi companies and outside the dominion of the Saudi Arabian Monetary Agency?

Mike said...

haha yes many see the trade as follows
finite oil for dollars that are infinite over time.
not knowing that dollars are part of the trade only because gold is cheapest to buy in that currency they use.

i don't know how much more gold but considering he said accounts must be lots.

Jenn said...

Hello imeasure-

James Turk has written a number of papers which address GLD. His most significant points are:

a) No one is allowed to audit the gold in their custodian's vaults, only GLD's financial statements are audited.

b) Their quartile reports indicate the GLD is an "Investment in Gold" which James points out can be paper or other promises to pay gold

Here's the relevant quote:

GLD is of course a listed security, but there are many reasons to conclude that it is not an alternative to owning physical gold. The most important is that the gold supposedly held by GLD is not audited.

To explain this point, GLDs financial statement is audited, but the gold is not. Its 10-Q reports the major asset of GLD to be an "Investment in Gold". It does not say just "Gold". This is an important distinction because these two labels are different for a reason. They describe fundamentally different assets. These two different labels make clear that "Investments in Gold" are one thing, but "Gold" is something else. Investments in gold can be nearly anything gold related. For example, they can be gold certificates and other promises to pay gold. Importantly, they do not have to be physical gold.

Therefore, all GLD has to do to satisfy its auditor is to show them the bank statement (i.e., a piece of paper) that says gold is stored in any Subcustodian appointed by the Custodian. The auditors do not have to go to the vault of the Subcustodian to prove that the gold actually exists, is not encumbered in any way, is securely placed in allocated storage, and accurately records the ownership of the fund.

If GLD declared its asset to be "Gold", the fund's auditor would have to substantiate that the gold really exists, which GLD of course cannot do because of the inability to audit or even inspect gold stored in subcustodians and sub-subcustodians, which is a risk noted in the prospectus. This reality just re-confirms what I and others have concluded all along GLD is just a paper scheme. It should not be considered as an alternative to physical gold ownership because it is not.

S said...


Congrats on lead ZH article. Well deserved.

One thing knawing on me is the idea that the Fed/Treasury and a coalition of the bankrupt (note the FT article this weekend abut task force to save the Euro) will strike one final time in the form of a supra sovereign solution. The comments by the Polish President at the UN are telling especially in the context of the plane crash and the ultimate leadership shift. That aside, the idea that the Fed are all in on pump priming is simply unbelievable. What the catalyst for such an imposition is anyones guess.

Whether this new currency has any lasting power is anyones guess. But rest assured there will be an attempt. The below the fold drama playing out over IMF leadership with the Germans asking the US to forgo its veto and the US calling on Europe to relinquish votes is all part of the process.

I have long thought that within the tiumverate of the Euro - US - Japan nexus that the later wa s the clear loser merely in terms of resources, demographics and geopolitics (as China emerges). Perhaps it is a coincidence, but the fact that those stories floated about the Jaopanese reported arrested at the Italian border with US bonds, followed by the North Korea Ship sinking in the wake of massive protests against the incumbant and his afffirmative stance on US basing (despite Okinawa and broader opposition) and ending with the recent vote whereby a Chinese/Japanese tussle happens just in time to flare nationalism and jingosim. Can this be merely chance? The hit pieces on Ozawa in the paper? The justification for keeping US troops in the region becasue of the NK sinking? The Russian diplomats comments this past week that NK and SK are on the brink of war?

At what level do the japanese go full kamakazie with the Yen in the face of an overt US plan to suffocate their economy. Interesting that the Japanese are turning their fervor towards the Chinese over a trawler incident while the US Fed suffocvates the economy. China is afterall the Chinese biggest trading partner. Thye question it would seem is at what point do the Japanese opt out of the US orbit and will it be too late? Thus is it any wonder with the recent election "win" is it any wonder the new Foreign Minister is well known for his "hawkishness."

If hypothetically the Japanese opted out in a grand bargain with China (Russia) it leaves the US flapping in the wind with the Europeans. In that scenario make no mistake it is the Bundesbank that holds the cards. Notwithstanding the obvious benefit the germans get from a cheap Euro, they obviously reliaze the current situation is untenable as per comments by the Finance Minsiter that the idea of extending the extraordinary programs beyond 2012 is simply not feasible. Would the Germans demand an asset backing for the currency? partial?

Sorry for the long post, but putting the notion of Freegold aside for a moment - perhaps you could speculate on what you think the plan B (ovtober surprise, whatever) is most likley to be? Seems to me the US is banking on ex anti behavioor from its traditional satellites when it appears such an assumption is unlikely at best.

Seems to me Japan and Germany hold the keys to how this gets resolved. The moment they decide to break formation is the moment freegold emerges in some form or fashion.

teki said...

Dear Tekin,

I did not mean to imply that investing in Gold futures on the Comex was a good idea if you want to preserve your wealth. Physical in multiple countries is the way to go - no ifs and or buts about it. Putting away at least enough to live out your days with a modest lifestyle is what I recommend as a minimum target.

I am merely arguing that paper contracts will pay off in paper at some point and that the at paper price will not be too far off the closing price of the contract. Will the closing price be manipulated - of course it will be - it always has been. Will there be delays in getting your money - almost certainly. Will the price go down - I doubt it. Will you be able to buy real gold with the paper - probably not, at least not in quantity. So what else is new.

Predicting prices of things in paper units is a dubious endeavor. One of my favorite and the most eloquent writer that I follow has been predicting Dow 6,000 for the past ten years because of the unsustainable nature of certain aspects of our society. He is of course been completely wrong. Or is he and he just doesn't realize it. From my youth I vividly remember the Dow going nowhere for ten years. It started at 1k and ended at 1k. On the surface it looks like you broke even. In reality you lost 75% of your money adjusting for inflation even using government statistics. The same thing has happen for the past ten years. The only difference is that the government has gotten a whole lot better at measuring inflation using dubious methods. It turns out that buying at the the top in 29, 68, and 99 cost you about the same; 75% of your wealth. If the eloquent blogger that I follow would just learn to measure wealth in real things like oil, gold and necessary products he would realize that he was in fact correct.

teki said...

miked - I am only talking about futures and options on futures. These can force you to take paper delivery rather than physical delivery. ETFs, dealers and storage companies that's a different question. I see these as a mixed bag. If you are going to invest in one of them, you had better do your homework first and make sure there is real allocated physical that really gets counted regularly if you are trying to preserve wealth. PHYS, CEF are some examples of these. If you want to gamble on the paper price, which I sometimes do, I like GLD because it is very liquid, especially if you want to leverage using options. When I do place bets, I am under no illusion that my actions have anything to do with preserving wealth or that I am making a serious long term investment.

teki said...


For wealth preservation I like CEF or PHYS for money trapped in an IRA. I am not an investment advisor and this is not investment advise - so do you homework. Big ETFs, these are very liquid and do seem to track gold very well. What will happen to these if a physical crunch comes along - I don't know. I have read plenty of articles that dig into the details of how much and how gold backs the ETF to worry. said...

If the paper market fails as described, it will not fail in such a way as to start recording lower prices (on the Offer). The market will simply go No Bid/No Offer. Robert Prechter won't get his 15 minutes in a thematic sense, though he may get an actual 15 minutes, and no more. In addition, I don't think it likely that all paper markets will fail. There will be enough anticipation of the paper market, say, in the OECD that either elsewhere in the OECD or in the emerging economies, either a new or existing exchange will resurrect the paper market--but probably with much shorter-dated contracts, and with higher inventory levels. A failure in the paper market as described is a huge event and hard to predict on the outcome level. In general, the flow of savings will probably then spill into the mining stocks and other commodities.

Anyway, it was a very enjoyable post and I do think the core concepts are correct. And yes, I do think some kind of disruption in price will occcur when the paper market fails, but here is the key idea: that will not prevent a real-time posting of the gold price. Someone will take up that slack.

teki said...


"finite oil for dollars that are infinite over time."

Even more so than most people think. The Saudi fields are aging and even they admit to a 7% depletion rate. The 264 billion barrels are paper barrels that were created at the stroke of a pen a number of years ago in response to OPEC production rate politics. The real number is a small fraction of the claimed number. Gas - that's a joke - they can barely produce enough for their own needs. They couldn't even entice companies in to help them produce more because the geology just isn't all that good for Gas. They have to pay services companies to do this work for the most part. A few companies have signed up - mostly just to be in the room in case interesting deals pop up.

Saudi Arabia isn't all that rich a country. The corruption at the top is of epic proportions. The real money has been siphoned off into foreign accounts or squandered on dubious investment's and expensive toys.. It wouldn't surprise me to find that a big chunk of the family money is in gold. To claim that Saudi Arabia has vast amounts of physical gold is almost certainly wrong. A few hundred tons - OK. Thousands of tons - no chance. Members of the royal family holding tons in foreign accounts - sure.

None of this is meant to imply that gold and oil are not linked as A, FOA and FOFOA state. The Saudi thieves who run things love gold. The country itself and the populace that's a different matter. They'll be back riding camels and fighting in regional wars sooner than most people believe is possible.

Edwardo said...

"They'll be back riding camels and fighting in regional wars sooner than most people believe is possible."

They already are. Recall that the "official" perpeptrators of 9/11, that includes OBL, were all Wahabist Saudis.

teki said...

You said:

I do think some kind of disruption in price will occcur when the paper market fails, but here is the key idea: that will not prevent a real-time posting of the gold price. Someone will take up that slack.

Thanks for stating what I have been trying to in a very clear succinct way.

I don't know about you, but I have been following A, FOA and now FOFOA for what must now be at least ten years. Big time thank you to them for all that they have done. In all honesty, this is is one of the first time that I have disagreed with FOFOA on something that I think is significant, which is why this is the first time I have ever posted on the subject.

Paper contracts will be paid in paper. Paper can be created in whatever quantities the treasury/fed desire. Both Ben and Alan have clearly and precisely stated this in unequivocal terms. I never believed them in the past because I thought that the bond market would limit what they can do. Boy, was I wrong. I have made loosing short position bets on the bond market bubble bursting. I have now come to realize that that is impossible for a auction to fail and that it will always be oversubscribed. I am now of the opinion that the Comex will not be allowed to fail and that whatever amounts of paper are needed to pay off paper bets will be created. This means a rising gold price in paper terms. What you will be able to do with your paper and how much will it buy - that's an entirely different question.

Mike said...

yep i remember following oil heavily back in 03-05 or so more so then gold. i then decided to change that idea since i realized i was against paper assets during that time but yet i wanted to invest in paper commodities ie stocks.....interesting :)

oil stocks didn't make much sense anymore once i flipped into bullion which to me sounded like a basket against all commodities.
what else has more value for trade then gold and is feasible to do so.

i've read about the saudi's not having as much oil reserves anymore etc.. during those times and i believe that and wonder if that if really true, that freegold will come even faster as they need to revalue the remains of what capital they have to make up for the oil that is gone.
i can see the same happening for peak oil.

what are these oil giants going to do with dollars when their oil is out which is why i believe another in this statement.

i also wonder what the status is with the gulf currency.

Mike said...


i differ in the idea that they dont have more gold then what is being said in the thousands of mt.

i strongly believe that they have more then meets the eye simply because i don't think they are that stupid.
oil is by far the most needed commodity for world trade and much more valuable then $75 barrel. oil at a local level is not needed as much but on global trade a lot would stop if oil wasn't used.

but our system and infrastructure isn't designed for the local level anymore so you can see how valuable it really is. maybe some people might be able to go without it locally but in mass no way.

more so in America then the rest of the world and this is the trade America made with the oil giants. since they had the most gold and are the only ones who can run deficits like this as long as gold flows or until mathematically the financial game can't continue. that is the benefit of everyone using your currency. no one else in this world could operate the way the USG does.

knowing that i highly doubt that the figures that another said about oil for gold aren't right.

Anon2000 said...

Great blog FOFOA. I've been lurking for the past few months, eagerly awaiting each new post!

In game theory analysis how does saving money in arable land perform? It's supply is relatively fixed, although perhaps less inelastic than gold. But why should gold be any more inelastic? If the price is high enough people will sell (or indeed, trade for land). I know that land taxes could be an issue, but then gold is also taxed in many countries. If it wasn't for golds ability to evade taxes easily, I would think land could give gold a run for it's money.

Obviously at this point in time, I would think that land is not the best option as unlike gold it's price has not been suppressed for the past 20+ years, but I ask only from a theoretical standpoint.

David said...

Great post FOFOA!

Unknown said...


It does not matter? Maybe to the Fofoa blogosphere clan it does not, but I can assure you that to real gold market particpants (not gold bugs) it does.

Unknown said...


Arable land you have to work on. There is a potential that is not realized if u own land and just hold it.

If u buy agr land to just speculate that is also fine but remember then that you are doing such. You are not storing wealth in the best way then IMO.


You seem to have, at least in first instance, a valid critique. You marry two concepts that appear true on the surface: 1. that gold has only speculative value and 2. that the most leveraged market creates the price.

1. seems inherent in the Freegold argument since it sees gold's value removed from industrial use, making many to draw the conslusion that its price mostly consists of a speculative premium.

2. is of course true by simple market mechanics.

However, can a market exist with just a speculative component? In my view, you can never justify the existence of such a thing legaly as it will amount to gambling. Therfore, the has to be some fundament to the market, a purpose for all that trading if you will.

This brings us to the second supposition above. You simply claim that the government will backstop any "wrong" price discoverer when he finds himself unable to perform on contracts and further add that the government also has the unlimited resources to do so (via dibiuos debt issuance). But dont you see that this only adds more paper to the fire? Only a backstop with physical, like what the BIS did some months ago and the CB's collectively did until 2-3 years ago, will work but those resources are very scarce and I highly doubt that they can do that legally anymore.

Unknown said...


And therein you see the reason why a paper-speculative only gold market cant exist. The fundmamental trade is actually whether you can deliver the backstop or not. And that is obviously tied to the betting entity's economic earning power, or the GDP if you will. That you can speculatively take part in.

FOFOA said...

Hello Geoff,

"...underground and proven gold reserves magnify any movement in the gold price?"

In mining stocks you own shares in a corporation with rights granted by permit from the government. For this reason, the gold in the ground actually belongs to "the people", and when it is revalued globally, it will become an "in ground wealth reserve", not unlike the oil in the ground to the Saudis. At that point the seigniorage value of pulling gold out of the ground will be either taxed or confiscated by the government on behalf of the people. And the mine values will probably not magnify any movement in the gold price. This is just common sense, but it is also what Another and FOA predicted.

FOA did own Gold Fields in 2001, but not for profit. He owned it to never ever sell it. And he owned it to support what he viewed as its gold market supporting actions.

@ imeasure,

Recommend reviewing my old post The Call of the Century re the affect of paper gold.

@ Moe,

I agree with Museice about Fort Knox.

@ Mike,

Regarding the Saudis, recommend reviewing GOLD & MONEY: More Than Meets the Eye.

@ S,

Any supersovereign currency is simply superfluous to Freegold, and not antithetical to it. It cannot solve the separation of monetary roles issue. It simply gives them a cross-border inflatable currency. As I said, superfluous (meaning requiring an extra step) to the Freegold adjustment mechanism that will emerge. And I believe any new international trade currency will eventually be circumvented for ease in international trade.

Recommend reviewing my post Bondage or Freegold?.

@ teki,

Thousands of small physical markets around the world take their lead from what you call "the casino." It's as if the betting line in Vegas actually determines the winner of the game. The sports teams don't even bother to play anymore. Just call the game at whatever line the sports book says it should be. At some point, a strong team will insist on playing a real game. At that point, a new sports book that follows the lead of the game results will emerge, with decidedly more credibility and quite a different outcome. And those holding receipts at the old casino will be cashed out with results that no longer reflect reality.

Levitating the paper gold market is not like what the Fed is doing with the stock market. Manipulating the paper gold market in the upward direction entails buying paper gold and delivering physical. This is different than just churning stocks and pouring in fresh dollars on low volume. The stock market doesn't have a physical delivery window. Aleksandar described this fairly well. The backstop cannot be in paper.

Suggest reading ANOTHER (THOUGHTS!) and perhaps also the Red Barron series.

Also recommend you read this about the Saudi gold buying: GOLD & MONEY: More Than Meets the Eye.


FOFOA said...


"Someone will take up that slack."

According to ANOTHER that someone will be the BIS as they put out a spread in physical only to the giants and other CB's once the paper markets in the US and London fail. It simply has to quote a buy/sell spread and let the other giants buy or sell to it. It is the only entity with the global credibility to do this. All the gold currently selling to the public in the European banking system will instantly be priced to this new market as will the Eurosystem reserves, which will put a floor under any panic playing out in Europe.

@ Descartes,

Land should do fine against hyperinflation. But the Freegold revaluation is a separate event. As I mentioned above, the BIS will administer a physical-only price discovery market for the largest amounts of gold. The new value of gold without the distortions of the LBMA and Comex will be more than enough to offset the loss of national reserves held in paper the world over. From there, Freegold and land will likely rise together in fiat terms. Us little PGA's are just going along for the ride. Please see my post, Your Own, Personal Freegold.

@ David,

Thank you. I didn't mean for this one to go viral. I didn't submit it to ZH. Just woke up and there it was. Guess Tyler must have liked it. Certainly wasn't my best writing. A little awkward actually. But I'm glad you enjoyed it.

@ All,

The phase transition to Freegold won't come without psychological challenges to the physical gold holders. And my post above seems to be one likely challenge we will face. It also reconciles with the predictions of ANOTHER and FOA. If all we were facing was a bumpy ride up the mountain and an eventual grand short squeeze, it would be quite easy to stand strong.

But also, in all likelihood, it will be lightning fast, like a "flash crash." Notice that I drew the drop as a vertical line, zero in the time dimension. So with a little luck, it won't be that big of a challenge to ride out the shift in price discovery markets. The important thing is that your gold is your savings for the long run. It is not your reservoir for your daily transactional needs. If you have everything in gold you risk having to liquidate during that period of unknown price. You don't want to do that.


Texan said...


My view is arable land will behave much the same as gold, it's been tracking pretty well as land I follow is up about 400% last 15 years or so. In the Midwest. In fact, land is probably already exhibiting some of the inelasticity of supply as prices move higher. Farmers will not sell, period. They are also cash rich, due to high grain prices, so they show up and bid high in auctions ( usually estates).

All that being said, there are many, many differences between land and gold. The most critical are that gold is portable and identical everywhere. Land is extremely local, and I don't mean that in a "location" sense, I mean your pool of buyers are whoever lives in the county, so maybe 5-10 buyers tops. Many games are played....

If I could only own one, gold or land (in any meaningful size), it would be gold.

Indenture said...


Why does it matter if there is any gold in Fort Knox if the doors are never opened? The world acts as if there are 'X' number of ounces in Fort Knox so why does it matter?

Indenture said...

Oh... If people need a date, an exact date when things will change try this:

GATA told it's readers to digest FOFOA's "The Shoeshine Boy" and Tyler Durden's "Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame"

I suggest you read Durden's piece and then read FOFOA's piece again.

We are given dates!

Anon2000 said...

Thanks for the replies.

@ Texan. Good to see theory working in practice. Let's hope for the same in Freegold! (though not just yet - need to acquire more ounces!)

Indenture said...

And now Ladies & Gentlemen for your reading pleasure I give you...

Gold is the final refuge against universal currency debasement

You have to feel this stuff is speeding towards a moment. An individual moment when the world sifts.

FOFOA said...

@ teki and Museice,

After digesting Tyler's excellent piece and his comment posted here, I can imagine a theoretical case in which confidence in the dollar collapses at the precise moment gold **IN SIZE** is withdrawn.

In this hypothetical case I can imagine a situation in which the price of paper gold never falls nominally. It may even rise nominally as it is falling "no bid" in real terms. As I have always said, my future predictions of gold at $55K or whatever are in today's dollar purchasing power. Gold will never actually trade for $55,000 dollars an ounce. It will be more like $100 billion an ounce or something even crazier than that if dollars haven't had zeros lopped off by then.

So viewed in this way, my chart at the bottom of the post represent paper versus physical in real terms, not dollar nominal terms. This is something I did not articulate in the post because it was beyond the scope of the post.

But I do mention it now because of Tyler's comment linked above. In the comment Tyler says:

"However, unlike FOFOA or others, we do not believe the value of gold at that point will be expressable in any fiat equivalents, since for the eureka moment of "gold as currency" realization to occur, it requires a necessary and sufficient condition of fiat termination. Plain and simple. As such, anyone who says at equilibirium gold will be worth XXXX dollars, has no idea what they are talking about."

Tyler and I do, obviously, have a difference in beliefs here. But that difference is not sufficiently articulated in his comment. But you can see a glimpse of it in this statement: "...for the eureka moment of "gold as currency" realization to occur, it requires a necessary and sufficient condition of fiat termination."

"gold as a currency" - This is not what the present situation portends. It portends a devaluation of all fiat currencies against the physical plane of real goods and services, but not fiat termination. It portends "gold as a wealth consolidating monetary reserve," not a transactional currency as I believe he is saying. Different fiats will experience different levels of devaluation because of their prior relationships with debt and gold. But they will not terminate and disappear.

After devaluation (hyperinflation in at least the dollar's case) cleanses the debt and nominal malinvestment out of the system, fiat currencies will then find a new equilibrium level with the physical plane of goods and services in the "transactional" role. And gold will do the same in the "wealth reserve" role. This equilibrium will be between the physical plane and the natural recipients of the newly separated monetary functions.

So fiat's new equilibrium will be "fiat versus stuff." And gold will be "gold versus stuff." A "fiat versus gold" equilibrium can be calculated at that point, and will in fact be the new adjustment mechanism between trading partners.


teki said...

FOFOA, thanks for your response. I have read and followed Another and FOA since they first came on the scene so many years ago. I have been preserving wealth in physical for over 40 years.

Levitating gold - I fully agree the Fed is powerless to control the outcome of what is and will happen in the physical gold markets. I am merely arguing that the treasury will bail out the Comex and that the holders of Comex contracts will get enough paper receipts to cover their bets in purely dollar terms. The value of those receipts will be a fraction of the real value of physical gold and the gamblers would have been better of on the physical world. The gamblers will have to wait for quite a while to get their dollars, making the loss vs physical even more painful. In dollar terms, I respectfully remain unconvinced that gold will fall all that much, if at all, when the a Comex debacle happens. What will happen is that the Comex will no longer be the leading price setting mechanism that is almost universally quoted around the world. The LBMA won't be a replacement either. Quotes, post Comex debacle, will be there and they will be higher in dollar terms.

As to the Saudi's - absolutely, gold is a big part of the oil equation. What I am arguing is that it's some parts of the corrupt royal family and not the Saudi people that are the biggest beneficiaries and that little of that wealth is in Saudi Arabia itself. Rather, it's in the personal name of a few of the smarter family members in other countries.

The most fascinating thing about the royal family is that many of them actually believe that the paper oil barrels that they conjured into existence are real. I know through some of my relationships that many of them refuse to see depletion and dire situation that they are in. I don't see it as a big stretch to say that people who refuse to see reality and who drink their own cool-aid may even believe in paper gold. Intelligence and insight is not distributed evenly there, just like it isn't here.

BTW - It was a pleasure watching the Jeff Rubin video again on the page in your link. Funny how one can often learn something new the second time through.

teki said...

FOFOA thanks again. You were responding while I was typing and I didn't see the next post.

"So viewed in this way, my chart at the bottom of the post represent paper versus physical in real terms, not dollar nominal terms."

That's exactly how I see it as well! Thanks for clarifying. It's hard to be precise, succinct and clear all at the same time. Your efforts and responses are appreciated.

FOFOA said...


So to correct Tyler's miscomprehension of Freegold displayed in this statement: "As such, anyone who says at equilibirium gold will be worth XXXX dollars, has no idea what they are talking about." I will make a small adjustment to his own words. "At equilibrium gold will be worth the present purchasing power of somewhere between $55,000 and $100,000 in my estimation." And at that time, it will take a whole lot more dollars than that to get you an ounce of gold, because the purchasing power of the dollar will be greatly diminished.

The dollar's value will fall far more than any other currency for many reasons. Its debt load. Its international float. The USG's insatiable need for a constant flow of dollars. Etc.. ect...

But fiat won't terminate. The dollar probably won't even terminate. It'll ultimately be reset with about a zillion zeros lopped off. Maybe even a fresh new name in a feeble attempt to shed some of its past notoriety.

This is the beauty of Freegold. The more currency you print, the greater the Freegold reserves backing your currency swell in value. And those Freegold reserves include both the official public gold reserves as well as all the private gold reserves held within your currency's legal tender zone. If you print too much currency then the price of gold will be seen rising and your currency will lose purchasing power, both at home and in international exchange. So your printing press will lose value. Not something a printer likes to see. This is the new adjustment mechanism and balance mechanism in the coming international monetary system.

The only thing that must happen before this emerges is for the dollar to lose global reserve status and for fiat currencies everywhere to devalue against the physical plane until they reach market equilibrium in their legal tender zones. Gold, in this case, will also have the unique job of maintaining the value of national treasuries as the vast debt holdings are wiped out.

Remember, other than debt, gold is the only reserve held by these central banks that actually have the power to bid it up to any price they see fit.

And yes, gold can increase to a value relative to the physical plane greater than the present value of all paper wealth. This is because gold is more durable as a wealth holding than paper with a counterparty. It has thousands of years track record, so it can extend out into the time dimension as far as the Giants want it to.

Please read my post, How Can We Possibly Calculate the Future Value of Gold? for more on this fascinating and unique characteristic of gold.

"Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability."

This is for all those who compare present paper wealth, or even "the present value of everything" and say gold cannot possibly be worth $55K in today's purchasing power, ever. Of course it can! It can be worth much more. It can be worth any amount of wealth created that is stored rather than consumed.

As long as producers store more of their wealth than they consume, and easy debt (through the use of debt as the store of wealth) no longer allows the stored wealth to be consumed by non-producers, that wealth flows right into gold's value. Of course if it is all deployed at once, then the value of gold will drop. But gold doesn't get spent all at once. The giants are masters at passing on wealth from generation to generation. As ANOTHER said, "it lies very still!" So there!


Unknown said...

The notion of a 'new' currency, or at least new 'look' of currency is being floated to the masses. I recently saw an article on yahoo ( showing potential designs. Only problem is, they were missing quite a few zeroes... ;-)

teki said...

"This is for all those who compare present paper wealth, or even "the present value of everything" and say gold cannot possibly be worth $55K in today's purchasing power, ever. Of course it can!"

One way that I convinced myself of that was to look a world wide GDP and savings rates in the context of the annual 1.7 trillion dollar federal deficit. Add in the fact that China is a net seller of late and that states and cities piled on debt. I defy anyone to find a plausible purchaser of all that new debt that is 4x over subscribed so that you end up with falling interest rates. Typical failed state antics.

Dave Narby said...


Here's a good question:

When the paper price disconnects from the physical price, what happens to the price of bullion trusts such as PHYS and GTU?

It seems as if the disconnect would have to register there as well, absent some sort of massive naked shorting (via the options market makers in those 'stocks').

I have been thinking of keeping a small amount in one or both of those just in case I have to sell some gold for fiat. But it *is* a paper claim, albeit on what is likely genuine physical.

miked said...

>>"This is for all those who compare present paper wealth, or even "the present value of everything" and say gold cannot possibly be worth $55K in today's purchasing power, ever. Of course it can!"

Assuming all savings go into gold. Whilst gold may well be an excellent store of value because of the stock/flow relationship, an asset that can be enjoyed will deliver more utility to the holder. Real estate is the obvious candidate although it isn't divisible and as liquid and isn't suitable for short term savings. Gold doesn't have to represent the wealth of all assets - just assets which depreciate or get consumed. The investor may choose to store his wealth directly in durable assets rather than gold.

FOFOA said...

Hello Miked,

The owners of the majority of the gold understand its power to store wealth. They have been using it in this way for a thousand years, passing wealth on from generation to generation. It's the "old world way." Guys like you and me, we're just tagging along on this ride. And soon, the governments will be too.

What we shrimps do with our gold really won't affect the value. It's what they do that matters. If you've got enough wealth to last generations, you don't blow it. You let it last. This is what they know. This is what ANOTHER meant about gold lying very still. It lies still so that it provides for its owners in the time dimension, not in the flash dimension.

Savings are not going to go into gold. That's not what is happening. Dollar-denominated savings will simply vanish and Freegold will appear. It is not a flow. It is a phase transition. How high gold goes depends not on you and me, but on them. Just get some so you can go along for the ride. Gold provides the ultimate utility to the big money. Nothing offers more "utility" to them than gold. Nothing!!


Martijn said...

"The time? These years be right for ones who save gold. One good ear knows meaning of wind in trees. The leaves come down as seasons change. Fools see falling price of gold as "death of tree", they chase it's price as leaves on the ground. Know you all, it is the season that has died.
Time will prove all things. Ones of simple thought, such as I will save the wood, not the leaf as they buy the gold, not the price! Thank You Another

Martijn said...

As Another points out, Westerners buy the price, not the gold.

They see the trail we discuss and follow only half the map. Then, when the "price" of gold fails, they visit their bitter venom upon us. Not because we were wrong, but because they want to follow their old charts.

But, how does one talk to a group, yet address only a concept of simple spirit? Buy the gold and forget the price. The present marketplace for gold does not establish it's value, only it's dollar exchange rate.


One of the "unalienable truths" that you speak of is that one cannot own what he does not possess. The entire dollar/debt economy is built on the exact opposite of this concept. That being, "if you hold it in contract form, you possess it's "physical equivalent". This can be extrapolated to include US stocks, treasury debt and even dollars themselves. The American Experience says that one only need to hold the "right to buy something" for such to be counted as real wealth.

This wholesale acceptance of "fraudulent wealth" has lead an entire generation of "Western workers" into saving nothing and thinking it's something! Once any tiny part of this concept is broken, it will call into question the validity of the entire "paper asset" world. Break the gold market pricing system and you will break the dollar. Break the dollar and the complete dollar based business system is market to the market. A marking that brings currency pricing in line with "on the minute supply" of real things. Not the price of things I can get in six months. The resulting dollar inflation will wreck the ability of most businesses to function at a profit. The gold business included!

Although it entails much more than monetary matters, it is interesting to notice how the legal industry has had some of the best growth rates over the past decades, at the same time we intensified the use of contracts/promises for denoting what we 'have'.

IT offers us better means to track promises, and I'm not saying this development is right or wrong by any means (it is just an observation), but personally I tend to avoid this paper world by possessing what I own.

Jeff said...


Would you address an apparent contradiction? You state that the government will encourage gold ownership by individuals, going so far as to eliminate the excessive taxation on gold. You also believe gold in the ground will be nationalized, or at least its value will be nationalized. Contradiction?

miked said...

I think the point Jeff is that the government (in their own view) is the only one allowed to profit from seigniorage. People can own (money) gold but not profit from its production.

bucephalus said...


I have had difficulty with my server, so if this post is duplicated, I apologize.

Thanks again for all your awesome work!

Question: do you believe that USA's 8,133 tons of gold would assist America's transition from the dead current Federal Reserve Note towards a provisional currency (similar to the Rentenmark, 1924 German currency)?



oldinvestor said...

@ buying physical gold in an IRA

There is a five part series at the Daily Bell by Terry Coxon that talks about open opportunity IRAs and the ability to use them to buy gold and many other investments. It is at

I have not researched this extensively, so do your own due diligence.

Excerpt ..

An ordinary IRA is sponsored by a financial institution – a bank, a mutual fund family, a stockbroker or an insurance company. Not surprisingly, it only allows you to use the investments or services the institution wants to promote. You do get the tax deferral that is at the heart of an IRA – a very good thing – but you don't get investment freedom. And the investments your IRA is permitted to buy are left in the hands of the IRA custodian the sponsoring institution has selected.

An Open Opportunity IRA changes all that. It doesn't just stretch the envelope of investment choices, it breaks out of it.

With an Open Opportunity IRA, the custodian you select holds just a single asset -the shares in a limited liability company (LLC) that you manage. You deal with the custodian just once, when you set up the structure and roll your IRA assets into it. From there on, you are in charge.

As Manager of your IRA's LLC, you open a bank account for the company wherever you want. The checkbook sits in your desk draw, and you are the only one who signs. You also can open a brokerage account for the LLC and give the buy and sell orders. But that's only the beginning of the possibilities. Acting as Manager of the IRA's LLC, you can:

• Buy gold coins and store them however you think fit – in safe deposit box at your local bank, in a Swiss depository or in a mayonnaise jar in the back of your refrigerator. You decide.

• Buy real estate, for appreciation or income

• Attend auctions and buy foreclosure property (as Manager of the LLC, you have full power to act quickly)

• Buy and rehabilitate dilapidated houses

FOFOA said...

Hello Jeff,

"Would you address an apparent contradiction?"

I take my lead from FOA on these subjects because I understand his reasoning and agree with his conclusions. As corporate entities, gold mines today are contractually beholden to the bullion banking system and the licensing government. Miked seems to have this one nailed. Here are a few random snips from FOA:

"I have presented this topic many times and again state that "all gold paper will burn". Most mine values included. Then and only then will gold values soar as physical units traded. Not before. As an adjunct, the illusion of most American paper wealth will also burn with this process that transitions the dollar away from reserve status.

"Truly, if ever there was a way to profit from gold mining, today, it's by buying this almost free physical gold the mines are producing; while mine players and paper gamblers pound their wealth into the dirt. This is what PGAs (Physical Gold Advocates) call benefiting from the leverage in mining (smile).

"Mine owners will see any near term profits evaporate into a government induced pricing contango that constrains stock equity with forced selling at paper gold prices.

"My personal view:

"They will, one day in the future, helplessly watch their investments fall far behind a world free market price for physical gold. Further into the future, one day, mines will make money on the last thousand per ounce price for gold; only the first $XX,000.00 of price will not be available to them.

"I also fully well expect that most world gold mine production will be forced to ship gold into the leftovers of the dollar cash settlement paper market until the Bullion Banking system is made whole on their physical side. In adjunct to this, the ECB and BIS will play a major role in cashing out failed paper gold positions for certain clients. Cashing out in Euros, that is.

"A US workout to cover its failed paper gold position will most likely be using gold industry profits. It could be done via "windfall tax legislation", plain tax or part of any variety of emergency financial arrangement. All built in order to allow our current gold reserves to be repriced at higher world levels and help our dollar stay somewhere in the next currency system. Considering the size of the failure, real gold will outperform any and all investments once this all gets started."

Bucephalus, that last one was for you. ;)


Unknown said...

FOFOA, can you provide a link to the post where you discuss the BIS destroying Russia "without firing a single shot"?

Pete said...

For those interested in thr ECBs gold:

Europe's central banks halt gold sales

raptor said...

I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.


costata said...


Ireland - (My emphasis)

"As with Portugal and Greece in Ireland the economic situation on the ground is becoming desperate. The main banks are basically insolvent and unable to lend. Capital expenditure by the government departments has stagnated. Taxes are rising to pay for the bloated interest charge on ballooning foreign borrowings.

Business cash flow has collapsed and credit is non existent. Many enterprises now no longer accept cheques and insist on cash or payment through credit or debit cards. Money has become very scarce."

Not sure how to interpret that last sentence. "Money is scarce" is a colloquialism that can mean everyone is having a tough time financially rather than there is a shortage of currency.

If the cost of supporting Euro debt is too onerous there could be an actual cash shortage as the system is drained of Euro to service debt.

Dave Narby said...

Been thinking about that other, less loved than the other (at least here) monetary metal...

If you figure the end price of gold (I know, I know 'price', but it's going to be convertible for something eventually) is $50,000, then if the Gold/Silver Ratio (GSR) stays where it is at 60:1, then silver goes to $833.00 (which is OK for silver holders).

However... If you consider the wild fluctuations of the GSR over time (half way down this page )

Then that ratio could end up anywhere from 96:1, or $520.00 (sad for silver holders) or... $5000.00 (WHOO-HOO! for silver holders).

Given the probability that silver has been depleted via industrial usage and that the banks are short 165 days of world production (as of August 7th, probably short 170 days now!), I have a feeling that the GSR might end up quite a bit lower, and perhaps lower than it's historical 16:1 ratio after it all shakes out.

I know the banks will likely settle in paper, but that's not going to prevent eventual price discovery, and I expect the banks will attempt (at least for decorum's sake) to cover some of it before giving the NYC salute to the COMEX/LBMA (and then sprinting with watery eye and lip-a-tremble to wise uncle Ben for a supplemental dose of quasi-government cheese).

FOFOA I know well your stance on gold, but if you could gaze into your crystal ball (and everyone else here, you are the best bunch of all the blogs I've frequented... And I have frequented thousands), what are your thoughts on where the GSR is likely to end up when the smoke clears, the dust settles, and the sun shines once again. And yes, I admit I may have gambling issues. ; )

Desperado said...


From the linked article:

"Increasingly the trend in Euroland is for Brussels to call the shots over local “sovereign” parliaments. In this crisis this development has turned out not to be beneficial. Local politicians have thus opted to pass the buck rather than courageously face up to the challenges."

The pampered and overpaid EU bureaucracy is as incompetent and as damaging as the US congress. Certainly one reason they had to bail out Anglo Irish Bank was due to pressure from the EU ruling elite. If memory serves me right, almost all of the EU basically agreed to guarantee all bank deposits simultaneously (within a couple of weeks). I would bet that this was an EU directive.

The Euro has turned into a straight jacket that is imprisoning the PIIGS while the low exchange rates due to their financial instability is benefiting German/Nordic exports. The stresses keep building, and likely as these exchange wars heat up the EMU will break apart.

The author also failed to mention that much of the miracle of the "Irish Tiger" was due to US manufacturers setting up shop there due to the low taxes and easy access to the EU markets. Well as we have seen many times before with globalization, once cheaper venues were discovered, the capital simply moved there. Dell shut down their plan in Ireland a couple of years ago. With US manufacturing off-shored to Asia, the chances of this US supported repeating is bleak.

Ireland is doubly screwed, because as I recall they have little or no gold reserves.

Pete said...

@ Dave Narby

See FOFOA's comment here, it may answer your question:

costata said...


Here's my 2 cents on this issue of gold versus silver. Both metals are available to purchase in weights that allow you to pay the same fiat currency amount. I suspect there is a psychological dimension to this debate i.e. you have to pay the same price for a single "grape" versus a whole "watermelon".

If you can overcome this obstacle it is really not a question of price. It is a question of relative value and future value.

IMHO the crucial differences between silver and gold are twofold.

1. Gold will have an official market under the auspices of the BIS (see A/FOA).

2. Central Banks and Treasuries hold gold as a reserve asset NOT silver.

Here's the crucial question. What is the maximum amount that the manufacturer (issuer) of a currency can pay for gold priced in their currency?

Gold has no currency price ceiling for the issuer of a currency. Under Freegold there will be a market dictated "maximum" price but it wont be dictated by a lack of a particular fiat currency on the part of the issuer.

FWIW I can understand that there could be other reasons for holding silver depending on where you live and the conditions you expect to emerge in the future.

costata said...


If you re-read that article it should become apparent that it was NOT the deposit guarrantees that slugged the Irish. It was the Government guarrantees to the private creditors of the private banks. (BTW I'm no fan of deposit guarrantees either.)

That decision, with or without EU intervention, demonstrates the collaboration between bankers and politicians in Dublin first and foremost, not Brussels. The same measures were/are being applied in countries outside the EU.

If the Irish government had simply allowed the private debts to remain private and refused to buy overvalued assets from their banks the situation would be quite different.

If governments had not allowed and/or assisted the FIRE sector to create the housing bubble (and every other recent bubble) we wouldn't be in this mess (I mean the GFC not your blog FOFOA).

If the oversized Irish government had shrunk itself it would have produced hardship but not the overall economic contraction they have created by driving the private sector into the ground.

I don't doubt that the government in Brussels is just as damaging to the EU as the Irish government has been in Ireland. They all seem to be attempting to screw the producers to advantage the parasites. What's new here? Is this very unique to the EU?

(Sorry Edwardo, I couldn't resist.)

FOFOA said...

Hello Dave Narby,

"I have a feeling that the GSR might end up quite a bit lower, and perhaps lower than it's historical 16:1 ratio after it all shakes out."

Why do people buy silver? Well, some think it is the way to protest against "Old World Ways." Against past wealth accumulation! Others think it is a vote against the NWO! Others, in the past, have thought of it as the "easy money" alternative to gold. That group of silver-bugs advocated an official inflationary policy. Gold was hard money. Silver was easy money. The "poor mans gold." But mostly today, they buy it simply for the supposed "leverage" it offers against gold.

Well, what if... just "what if" it ends up at a GSR of 2,000:1 instead of 16:1? What kind of "leverage" was that? (The kind you'd prefer having some K-Y to prepare for?)

What if scarcity doesn't matter in a monetary metal? What if STABILITY is infinitely more important than scarcity? What if the "stocks to flow ratio" matters infinitely more than scarcity? What if the gold stock to flow ratio at today's prices is more than 175 times greater than silver?

What if silver's wonderful history as a monetarily important part of "bimetallism" ended more than a century ago? Can you show me a politician or central banker that has said anything about silver lately? Was there ever a "London Silver Pool?" How about a WAS/CBSA (Washington Agreement on Silver/Central Bank Silver Agreement)? When was the last "silver standard?"

If you want to know the truth, most of the heavy-handed silver advocates have themselves a healthy stash of gold. They would probably like to see the price of silver spike so that they could offload some of their oversized commitment. That's kind of where I'm at with silver too. I would love to see a price spike right now! Maybe $30? How about $50 even!!!! I would love that.

But while the gamble of that happening is enough to keep me from liquidating my silver completely all at once, it is not enough to get me to buy any new silver. I have "matured" since my last silver purchase (which was before I finished reading A/FOA for the first time). I'm now looking long term. I'm in for the sure thing, not the "leveraged gamble."


FOFOA said...


The $IMFS loves that silver is associated with gold! It "commoditizes" gold. It takes much attention away from "gold-the-wealth" and puts it on "precious metals."

But there are so many would-be gold bugs with no savings that want to participate in the gold revaluation that don't understand. And they still see the silver price rising with the gold they can't reach.

So they are convinced that silver will outperform gold, and so don't touch the yellow wealth metal. They speculate! Exactly what the $IMFS wants them to do.

You want to use silver as a call option on gold? Go for it. But then you are an active trader. You must be alert and prepared to take a loss and live with regrets.

I know all the standard arguments for silver. So save your effort. I spent a year studying them while I was accumulating silver.

"There is less silver than gold." Makes it a worse monetary metal at this point. Less stability.

"Historic 16:1 ratio." Good luck with that one. Bimetallism was officially abandoned more than 100 years ago.

"More industrial demand for silver." Uh-huh. Yup, it's a commodity metal now, and susceptible to economic forces.

"TPTB don't have any to suppress the market." Uh-huh. Yup, and they don't have any reason to bother supporting a revaluation when the dollar collapses either. In fact, they have an incentive to do the opposite! To support a WIDENING of the GSR so that industry doesn't suffer.

"Gold's too expensive." Then you don't understand money.

"You get more silver than you get gold." Yeah, you get more iron scrap too.

Puh-leeeeze. Don't come hit me with these tired arguments. I will not respond. I probably left out a few too.

If you feel better buying silver than gold, then just go for it. It won't affect Freegold in the least. I won't hold it against you!! It will help it in fact. Just like dumping your dollars for wheat or oil will help speed the process. And if you are one of the few who know where I am, and you want some silver right at spot, any amount, send me an email if you are close enough to come get it. I do have silver for sale!


g. said...

Owning silver is a hedge against not owning silver ;-)

That being said, I do think silver will have it's use in a SHTF scenario, just because it is a "harder" money than fiat.

So I did buy a few hundred ounces of silver (maple leafs), just in case. There is no real need to sell it, and is a small enough part of my PM-stash.

costata said...


The silver bugs will have their FOFOA voodoo dolls bristling with silver needles before daybreak.

On reflection, having seen your photograph you may benefit, here and there, from a little acupuncture.

FOFOA said...

@ Costata,

"The silver bugs will have their FOFOA voodoo dolls bristling with silver needles before daybreak."

So true! I should have listened to you and stopped posting while enjoying a cocktail.

FOFOA said...

@ Costata,

I've only posted two pictures of myself. So you must be referring to this one in which I was more in need of a good wax than acupuncture.

Or maybe it was this one. In this one I was trying to get some therapy of one kind or another but she just wouldn't fall for the "Hey, don't you know who I am? I'm FOFOA" line.


Edwardo said...


With respect to your comments that physical will likely not be taxed (except minimally) or confiscated, perhaps you could comment on the present state of affairs which seems to be one where the tendency of government is to establish more control, rather than less.

I have in mind the 28% capital gains tax on PM coins and related products, and the new legislation requiring coin shops/dealers to report transactions of $600 or more.

Michael H said...

@ Edwardo,

I think I finally understand why gold will not be taxed in a freegold system.

If you are the government, you want direct foreign investment on your soil. That capital flow into your territory will build up your economy and increase your tax base. Then you can tax incomes, tax the movement of goods, etc. You do not tax the initial movement of capital, because otherwise no one would invest in your country.

Gold is wealth, and it can be converted into capital. The more gold that gets converted into your currency, to be invested as capital in your land, the better for you.

And, if the gold is converted into your currency for consumption, then you simply tax the currency transaction, with a sales tax or VAT. But first, the wealth has to move into your currency, and you want to encourage -- not hinder -- that movement.

Unknown said...

Hey, silver has its purpose. That is, fine tableware and fighting werewolves.

Mike said...


i took your advice many months ago and i have traded 80% of my silver so far for Gold since i bought it at the low in 2008 (comex bars)

I also thought about all those same arguments silver bugs think which is what sucked me in but then i learned better from this blog.

i have still a good amount with the 20% i have left but i have been bartering slowly during this silver run of late. i would love to see 45 to 1 because i will get even more gold.

best thing about silver is people pay 10%+ premiums for it while in gold it is still 1-2% so whatever the ratio is right now you can trade for it even lower ie 60 to 1 can be 56 to 1.

thanks again

Edwardo said...

That makes perfect sense, Michael, which, given the propensity of government to do things in direct contravention of rationality, already has me doubtful that we will ever see it. I am being a tad facetious now, but I will must say that traveling from our present state of affairs- where physical gold and silver are taxed at a higher rate than other assets, and stringent reporting requirements of same have just been instituted- to the one you (and FOFOA?) describe, strains the imagination somewhat given the great chasm that will have to be bridged between the present and the proposed future.

Blindweb said...


I've read all your posts (although I should go back and reread them all) and I agree with free gold. I have one argument for your price targets, and one argument against them:

I ask myself, what value should human society give to an item that can cause currency values to be trusted? How much value does that item add to society? To me that should be one of the most valuable things in the world. If gold is the best item to do thi, through free gold, which I think it is, then gold should hit your target.

On the other hand we have peak oil. I watched your video on localization from peak oil. Localization destroys wealth as measured today. To use an example from peak oil writer John Michael Greer: I walk to my local farmer's market to buy raspberries. I then take them home and make homemade jam reusing a canning jar. I'm actually decreasing GDP compared to buying it from the supermarket. The supermarket purchase involves many layers of workers, many more physical items, factories, trucks, and much more energy usage.

Gold will be 50x more valuable to future societies, compared to their total wealth; but there will be 10x less wealth, savings, and currency transactions. So gold will end up much closer to its historic value, eventually. Basically gold will take up a much larger percentage of the shrinking wealth pie.

I particularly liked your county fair example using gold and scrip. I foresee endless local currencies with gold used for savings and inter-region trade.

Anonymous said...

Some comic relief from WSG blogs...

Greyfox "It's the Debt, Stupid" said...

Even the Chinese are aware of the coming dollar crisis (world-wide loss of confidence).

Dollar Is `One Step Nearer' to Crisis on Burgeoning Debt Burden, Yu Says

The U.S. dollar is “one step nearer” to a crisis as debt levels in the world’s largest economy increase, said Yu Yongding, a former adviser to China’s central bank.

Any appreciation of the dollar is “really temporary” and a devaluation of the currency is inevitable as U.S. debt rises, Yu said in a speech in Singapore today.

“Such a huge amount of debt is terrible,” Yu said. “The situation will be worsening day by day. I think we are one step nearer to a U.S.-dollar crisis.”

Greyfox "It's the Debt, Stupid" said...

Trade your Yankee dollars for real wealth while they are still worth something.

Gold Takes Out All Limit Orders To Hit Fresh All Time High $1,307.

The Fed thinks it can destroy the dollar? Sure they can. Too bad fewer and fewer people actually give a rat's ass anymore. Gold just took out the $1,300 psychological barrier. Next stop, as predicted earlier today by BofA's Widmer: $1,500

Robert Mix said...

Kept my promise I made this weekend: bought gold Monday! And for me a big purchase. Been buying since the 1980s.

I mostly buy FOFOA's end-game analysis, but as I have said before, I don't KNOW anything. Because I don't KNOW anything, I choose diversification. I am really well diversified, including nice holdings of precious metals. So, FWIW, I do have decent holdings of the four below:

Au: 70% DOLLAR value of my PM holdings
Ag: 4%
Pt: 25%
Pd: 1%

I hold a fair number of Ag ounces to be used as money in a SHTF scenario. Pt? Well, I just LIKE platinum. Pd? A small speculation that has done well!

I also have small holdings in Pb and lead delivery devices, because, as they say, LEAD is a precious metal if moving at a high enough velocity!

FOGARB (Friend Of Gold And Rolling Bearings)
DoChenRollingBearing (at zerohedge)

Desperado said...

It starts...

The “animal spirits” of which Keynes spoke are on the prowl across the United States. Their mood is ugly. The spirits are wary and troubled. Corporations and individuals are hoarding cash, when they have any, because they’re not buying into the recovery.

That's right, spend your savings as our leader commands, or be prepared to be labeled "hoarder".

The New American Normal

miked said...

Hello Blindweb

I can't comment on what it means for the gold price because I have no idea but peak oil is a worry.

What most people don't realize is that all the development in GDP we have had in the last 100 years has been in direct proportion to hydrocarbon consumption. Just look at some of these charts.

The optimists will tell you science finds a solution for anything but the sad truth is without oil we would be back in 1900.

Anonymous said...

Wow - Denninger is starting to sound like me. (That is, in a FG environment, the situation will be too dicey to enjoy one's stash.)
Poster: Will physical gold be the only strategy when we pass the point of no return?

Denninger: Physical gold will do you no good, and neither will any financial asset anywhere.


There isn't one. Either you deal with it NOW, and stop it, or it isn't going to matter.

The people here ought to have enough brains in their head to know that this sort of horse**** "something for nothing" game WILL NOT WORK.
I particularly like Karl's phrase "something for nothing". That is, if you think gold is going to increase by a factor of 25-35X, your security costs will increase proportionately as well to net out any gain.

Weirdly, Nicole Foss (Stoneleigh) might be right even though she is wrong. While she thinks the dollar will strengthen (wrong!), she also believes a small, self-sustaining farm is the best long-term bet.

Edwardo said...

Regarding the following comment,

"Wow - Denninger is starting to sound like me. (That is, in a FG environment, the situation will be too dicey to enjoy one's stash.)"

There aren't too many bloggers about who are as sure of themselves (and contemptuous of differing views-he's managed to run off most of his former idolators)as Karl Denninger. In the meantime, his churlishness knows no bounds. To wit: Because he has been so spectacularly wrong on gold-and will continue to be- and clearly doesn't own any, he can't stand the idea of anyone benefiting from a choice than runs so contrary to his views.

Michael H said...

@ snerfling:

As Edwardo said, Denninger and gold don't mix. I'm not sure what he means by "Either you deal with it NOW, and stop it, or it isn't going to matter." There is no way us little people can halt the developments occurring in the economy. All we can do is weather the storm. Taking possession of gold is 'dealing with it NOW', since we won't be able to buy gold later.

As for 'something for nothing games' ... yes, gold is something for nothing, unlike that US dollar.

As for a small self-sustaining farm: this is not an either-or proposition. Gold is for saving, not earning income. Follow whatever avocation you deem will provide you with a steady income while being enjoyable enough to work at.

There is a lot of work behind the phrase 'self-sustaining farm.'


The caption to the second picture should read: "FOFOA: Exposing you to gold since 2008."

Mike said...

Some comic relief from WSG blogs...

ya just reading the article and the comments makes me laugh. i actually heard this story on the radio this morning and they said its going to be a mania and not to be a part of it. this is in canada btw where most citizens dont hold any physical gold but rather mining stocks in their rrsp's or stock portfolio all waiting for the paper gold gains :)

gold is the bubble no one owns lol

but in freegold, gold atm's is the right thing to support the wealth reserve function of the nation.

Dave Narby said...

Part 1

FOFOA, et. al.

Thank you for your detailed responses.

I am 70/30 gold/silver. I will be looking to trade silver for gold as the GSR sinks lower to reach a 90/10 holding. However, I think it could get quite low before it recovers.

Here's my reasoning:

First, FOFOA from some time ago

"Another had a better feeling about silver than FOA did. I am split. On an analytical level I tend to agree with FOA. But I do have some silver myself. And on an emotional level I hope, and think that silver will spike "on the way there". And based on this assessment, I am sitting on my silver right now... but it will (mostly) be the first to go. "

I agree. I think silver will likely appreciate more quickly than gold, both from it's perceived easier accessibility (less $ per oz) and from the un-coverable short position by the bullion banks.

FOFOA Again:

"Why do people buy silver? Well, some think it is the way to protest against "Old World Ways." Against past wealth accumulation! Others think it is a vote against the NWO! Others, in the past, have thought of it as the "easy money" alternative to gold. That group of silver-bugs advocated an official inflationary policy. Gold was hard money. Silver was easy money. The "poor mans gold." But mostly today, they buy it simply for the supposed "leverage" it offers against gold."

I wasn't looking to 'lever up'.

Actually, I bought it for different reasons:

Historically it is undervalued relative to gold.
It has been massively naked shorted (170 days world production).
It is useful for small purchases if fiat becomes TP, as *it also is money*.

"Well, what if... just "what if" it ends up at a GSR of 2,000:1 instead of 16:1? What kind of "leverage" was that? (The kind you'd prefer having some K-Y to prepare for?)"

That would require abandoning more than 5000 years human beings using silver as money. Possible, (we abandoned using gold, after all!), but IMO unlikely in a scenario where gold becomes money again (even if not used for day to day transactions.

From what I can tell, the GSR has mainly dependent on whether or not society views it as money. When it does, the GSR drops. When it doesn't, it rises. I think that still holds, but in the 21st century, we also have to add industrial demand, which actually consumes silver.

Dave Narby said...

Part 2

"What if scarcity doesn't matter in a monetary metal? What if STABILITY is infinitely more important than scarcity? What if the "stocks to flow ratio" matters infinitely more than scarcity? What if the gold stock to flow ratio at today's prices is more than 175 times greater than silver?"

You may have lost me here. I would think the stocks to flow vs. demand (and consumption) for silver would be more important. Gonna have to think about that one...

"What if silver's wonderful history as a monetarily important part of "bimetallism" ended more than a century ago?"

For governments? Yes. So did gold!

But for people? Mmm...

Also, the problem with bimetallism is that they tried to force an exchange rate on the market, as opposed to allowing "Freesilver"!

"Can you show me a politician or central banker that has said anything about silver lately? Was there ever a "London Silver Pool?" How about a WAS/CBSA (Washington Agreement on Silver/Central Bank Silver Agreement)? When was the last "silver standard?" "

I am not so sure that the world, deprived of gold at psychologically acceptable prices, will not use silver as money again.

Also, the rejection of silver by politicians and bankers, IMO was a tactic in their efforts to divorce ALL money from precious metals. They started with silver because it was the 'weak sister'.

"If you want to know the truth, most of the heavy-handed silver advocates have themselves a healthy stash of gold. They would probably like to see the price of silver spike so that they could offload some of their oversized commitment. That's kind of where I'm at with silver too. I would love to see a price spike right now! Maybe $30? How about $50 even!!!! I would love that."

Me too. I would send my rounds to the dealer for exchange!

"But while the gamble of that happening is enough to keep me from liquidating my silver completely all at once, it is not enough to get me to buy any new silver. I have "matured" since my last silver purchase (which was before I finished reading A/FOA for the first time). I'm now looking long term. I'm in for the sure thing, not the "leveraged gamble." "

We agree.

The question I asked was for yours and others best guess as to what is the GSR is likely to do, and why.

Because to a certain extent we are both speculating owning silver, (although I am speculating more by being overweight silver AT THIS MOMENT...). : )

Dave Narby said...


Can you give the link or some keywords to FOFOA's localization video? I looked, but could not find.


Denninger is acting like a scared little girl. He lives in Florida, for Christ's sake... BUY A GUN, Karl!

I believe he suffers from the angst many money managers/commenters/financial industry types suffer from with respects to gold: It threatens their livelyhood, so they shake their fists and curse at it (Damn you gold! Why couldn't our banker class keep our money as good as you!?!).

I think the transition period will be 1-3 months, and there will be some localized violence (mostly old scores getting settled due to lack of policing), so some precautions are necessary (stock up on anything imported!), but it also helps if you don't tell the entire neighborhood you're sitting on tubes of Krugerrands..!

littlepeople said...


I have a few comments regarding your earlier post re: silver. You said bimettalism died over 100 years ago. However, we had gold and silver circulating together in the U. S. as late as 1932, til FDR confiscated gold.

You also asked when there ever was a "silver standard." We had one in the U.S. from 1933 til 1964, then a partial one til 1969 (40% Kennedy halves from 1965-1969). Also, China was on a silver standard for centuries, til fiat came to rule the day.

FOA and Another wrote at a time before the continuingly huge rise of China in international finance and production. China now restricts exports of gold, silver and rare earths. China will determine what they will accept in trade for what they have/produce. They will likely want oil, NG, food, gold, palladium, silver, etc.

I do not believe the eurolanders alone will hold such a strong grip on what happens to gold prices, ala "Freegold" as you do. I happen to believe gold will become extremely valuable, but so will other commodities, depending upon what China determines they want at any given time. And the sino nation has had a long, long affinity for silver. I do not see the same grand 2000:1 GSR as you do. It is okay to disagree in detail, if not concept, I think.

That being said, you do a great service to get people to recognize the fallacies of the fiat system without free commodities, and I commend you.

holdinmyown said...

Greetings FOFOA;
I have been reading your blog for over one year and I must commend you on your ability to convey difficult concepts in a manner that can be easily understood by all. My guess is that you were/are a teacher since, as any good teacher knows the best way to fully understand a concept yourself is to teach it to another person. It has a way of sharpening your understanding. I also suspect that you and John Law (the blogger) are one and the same person.

Now to my question: You have stated that in the event of the COMEX and LBMA losing their relevance in discovering the price of gold that the BIS would take over this function of price discovery for gold in Euros. I assume that this relationship between gold and Euros would then set prices for all currencies through the Fx markets.

Perhaps it is not necessary for the BIS to take on this role directly. Perhaps any country could perform this price discovery in a freegold environment? For the purpose of my proposal I will try to meld the thoughts of FO/FO/A (freegold) with those of Antal Fekete and Hugo Salinas-Price. Any country could initiate freegold by "opening the mint to gold" as suggested by Fekete. The trick would be to allow all citizens to deliver their gold to the mint in an oz for oz exchange for gold coins (net of manufacturing/transportation costs plus a small seignorage for the host government). No other taxes would apply to the exchange. The coins would not carry a face value but could be exchanged for local currency at a price that would be quoted daily by the mint. The coins could be used as a means of exchange but Gresham's law would likely preclude this. The coins could be held personally or deposited in a bank or used as collateral for borrowing. The owner would have complete freedom to use the coins as she sees fit. Now to borrow from Salinas-Price, it is important that the government of the country guarantee that once a new price is set, it will never again be reduced below that exchange price. In other words the mint can only increase the price of gold in local currency (or decrease the price of currency in gold if you prefer) but once this price of gold is set the government will defend it from falling but not from rising. The price of gold will naturally "levitate" due to its use as a medium of saving but if savings fall then the government must print a sufficient amount of currency to keep the price of gold from falling. Why is this important? Because savers will be more likely to use gold as the preferred medium af saving if they are assured that they will always receive the equivalent purchasing power (or better) than that which was deferred in the past. They cannot lose the purchasing power of their savings from a sudden and pervasive dishoarding and desire to consume by society in general.

teki said...

Robert Mundell on bloomberg

The euro-dollar fluctuation “is a terrible thing for the world economy,” Mundell said. “We’ve never been in this unstable position in the entire currency history of 3,000 years.”

That's a strong statement from the father of the euro.

I hunted around for a bit, but couldn't find much more detail other then this brief quote.

Anyone have any knowledge or thoughts on exactly what he is talking about? 3000 years. How many empires and large scales wars have happened the that big a time interval and this is the worst? Worse than the collapse of Rome?

Michael H said...

@ littlepeople:

Is the USA in a 'nickel' standard now? The time period you mention, 1933-1964, was not one of silver standard but one of silver currency.

In a silver currency, the coins are made of a metal, and are stamped with a currency value in excess of the melt value of the metal. This excess value goes to the government.

In a silver standard, non-silver currency in circulation would be exchangeable for silver, at par with the currency. In other words, $1 bill exchanged would bring ~$1 of melt-value silver. This is how the gold standard worked.

The earlier bimetallic standard FOFOA mentioned worked like this: you could exchange dollars for gold, or you could exchange dollars for silver (and vice-versa for both).

Bimetallism caused trouble when the USA had a different silver exchange rate than other countries. There formed a carry trade: Gold -> silver in the US, transport the silver to Europe, silver -> larger quantity of gold in Europe, and take the gold back to the US.

Michael H said...

@ holdinyown:

There is a contradiction within your proposed system.

"but if savings fall then the government must print a sufficient amount of currency to keep the price of gold from falling. Why is this important? Because savers will be more likely to use gold as the preferred medium af saving if they are assured that they will always receive the equivalent purchasing power (or better) than that which was deferred in the past."

If the government prints currency to keep the price of gold from falling, it would be inflating the currency and reducing its purchasing power. Gold savings purchasing power would still decline, only the nominal price would remain unchanged.

What the government would have to do in this case is buy gold, and I suspect they would have to do it without resorting to printed dollars in order to keep the currency from inflating. In other words, the government would have to guarantee to its citizens that it would be a net saver at the precise times that the citizens are drawing down their savings.

I believe Japan might be nearing this point. Do you think the Japanese government will run a (real) surplus in the coming years?

Michael H said...

One more comment, as a general comment on silver.

The fact that silver has industrial uses is a strike against this metal for use as savings, as far as the giants are concerned.

To see why, look at oil. Imagine OPEC really wanted to squeeze the west. They slow their oil production to a trickle. What happens? First, of course, the spot price skyrockets as the last stored oil is burned up. But then, as oil stops flowing, the infrastructure and industry that oil supports will atrophy, and demand will fall away. Now, instead of having the west at its mrecy, OPEC has just succeeded in returning its economy to nomads herding sheep.

I imagine a similar dynamic would occur with silver. If the price of silver is too high for industry to absorb, the industrial demand will disappear.

This scenario would leave investment demand of course ... but it shows exactly why there is an incentive to limit that investment demand as much as possible.

Overall, A / FOA / FOFOA's position on silver reflects the long-term expected outcomes. Short-term, I see it as a literal coin-toss. Which spring is tighter wound, and which will release first? Gold, or silver?

FWIW, FOA predicted that gold would have a huge run-up in price before a hyperinflation hit, and then outrun all other real goods during the hyperinflation. But 'time will prove all things'.

(I, too, own a fair amount of silver, and am thinking about when to trade it for gold).

SatyaPranava said...

@michaelH: There is a lot of work behind the phrase 'self-sustaining farm.'

actually you might be surprised that one can creat a 1-2 acre food forest or similar self-sustaining micro-ecosystem for about 50-100 man hours, and one that could easily sustain anywhere from 100-1000 people depending on where one lived in the US (or world).

and, self-sustaining should be self-explanatory, but the work that goes in is mostly in the initial setup if it's truly self-sustaining. then all one has to do is harvest and let nature take over.

so one can keep their stash of FG for AFTER the crisis has passed. i'm not sure i don't disagree with Karl in his myopic interpretation of gold DURING a hyperinflationary crisis. I think it's quite possible people won't get value, but instead will bid for dollars or other assets at a steep discount.


FOFOA said...

Michael H,

You clearly have a good understanding of things!

@ All re: Silver

In order to understand why silver cannot chase gold in Freegold you must understand what is really happening with gold. My best recommendation is to start with the ANOTHER and FOA archives. The past ratios between silver and gold can all be explained with an understanding of the monetary history and their relatively similar roles throughout, as well as the subtle differences. FOA goes into this history in depth. Mundell is also good.

Changes to the ratio throughout history can be understood through circulation velocity, coinage overvaluation, reserve vs. transactional roles, etc... What is happening today is happening to gold and not to silver. It's not a simple reversion to the ratio mean as all technical analysts would love. There is a role change coming for gold that is not coming for silver. It's not you and I that impart the necessary value to them to change this role. It is the truly wealthy of this world and the super producers. The giants. They impart value and they have already chosen gold... a long time ago. We are just going along for the ride thanks to ANOTHER and Ben Bernanke.


FOFOA said...

@ Blindweb,

I do understand your real economic contraction model. But I think you are missing the time dimension-expanding nature of a durable wealth reserve as opposed to the auto-limiting nature of a reserve requiring counterparty performance. In this equation, "total wealth" and peak oil contraction of modern goods are not factors. From my earlier comment:

And yes, gold can increase to a value relative to the physical plane greater than the present value of all paper wealth. This is because gold is more durable as a wealth holding than paper with a counterparty. It has thousands of years track record, so it can extend out into the time dimension as far as the Giants want it to. [And by this I mean as long as they don't deploy their wealth en masse, which they never do.]

Please read my post, How Can We Possibly Calculate the Future Value of Gold? for more on this fascinating and unique characteristic of gold.

"Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability."

This is for all those who compare present paper wealth, or even "the present value of everything" and say gold cannot possibly be worth $55K in today's purchasing power, ever. Of course it can! It can be worth much more. It can be worth any amount of wealth created that is stored rather than consumed.

As long as producers store more of their wealth than they consume, and easy debt (through the use of debt as the store of wealth) no longer allows the stored wealth to be consumed by non-producers, that wealth flows right into gold's value. Of course if it is all deployed at once, then the value of gold will drop. But gold doesn't get spent all at once. The giants are masters at passing on wealth from generation to generation. As ANOTHER said, "it lies very still!"


FOFOA said...

@ littlepeople,

The way real economists define bimetallism and the "silver standard," bimetallism ended in the 1800's as did all Western silver standards. China and HK finally abandoned the Eastern silver standard in 1935.

I highly recommend this paper to all of you. It is an excellent read! Written by Robert Mundell in 1997. Here's a snip on bimetallism:

"But, what happened in the 1870s? France went to
war with Germany and had to suspend
convertibility. Then nobody was on bimetallism,
except for a few countries like Belgium and
Switzerland that were in the Latin Monetary
Union, but these countries were too small to
managed the system and therefore followed
France's lead and suspended convertibility. France
pondered the idea of returning to a bimetallic
monetary standard, but with American production
of silver going up and Germany dumping silver as
the new German Empire shifted to gold, France
realized it would have to buy up all the excess
silver in the world on it own. Silver would have
displaced all gold currency. So France did not go
back to bimetallism and that system therefore
became a dead letter. The world economy now
split into an international gold standard on one
hand and an international silver standard on the
other. Silver's monetary role was diminishing and
the gold brigade was beginning to encompass

"Over the period from 1873 to 1896, the price level
was falling. This was the period of populist revolts
in the Midwest. The populists hated the fact that
farmers had to pay back debts with an appreciated
currency. In 1896, William Jennings Bryan's
electrified his audience with his Drexel Avenue
speech in Chicago in which he charted that the
American farmer was being "crucified on a cross
of gold." There was deflation in the gold countries
in this period because when countries shifted fro
bimetallism to the gold standard, the movement
created an excess demand for gold--tight money--
and as a result, deflation. Also in 1873, Prussia
and the Scandinavian countries abandoned the
silver standard, depressing silver and creating
inflation in countries sticking to silver. So there
were two worlds during that time period: an
inflationary silver world and a deflationary gold
world until 1896, when, finally, soaring gold
supplies from South Africa, where gold had been
discovered in the Witswatersrand in 1886,
combined with the introduction of the cyanide
process to bring huge amounts of gold into the

And to teki, I also recommend this from Mundell and Freidman.


Tyrone said...

Video:All That Glitters is Gold


Dave Narby said...

@ Michael H.

The problem with silver was that they stamped a dollar amount on it. I they had simply stamped a weight on it, there would have been no problem.

If you would be so kind, please mention when you swap your silver for gold, how you did so, and why. I will do the same. I consulted some charts and am currently leaning towards 25:1.


"What is happening today is happening to gold and not to silver. It's not a simple reversion to the ratio mean as all technical analysts would love. There is a role change coming for gold that is not coming for silver. It's not you and I that impart the necessary value to them to change this role. It is the truly wealthy of this world and the super producers. The giants. They impart value and they have already chosen gold... a long time ago. We are just going along for the ride thanks to ANOTHER and Ben Bernanke. "

Thanks for mentioning this again. This is perhaps the best argument for gold vs. silver.

I do wonder if these giants are in fact "the market", however. Because nobody is bigger than "the market"... So for for what you posit to play out, they would have to be it.

FOFOA said...

Hello Dave Narby,

"I do wonder if these giants are in fact "the market", however. Because nobody is bigger than "the market"... So for for what you posit to play out, they would have to be it."

Stocks versus flow... if they don't liquidate their wealth when gold hits (present purchasing power) $25,000, then they ARE the market.

And bear in mind that they won't liquidate no matter what VALUE it reaches. They KNOW that gold performs in the time dimension. Only so many jet skis you can own in one lifetime. Think about that for a while. It has a lot of power. ;)


Dave Narby said...

"And bear in mind that they won't liquidate no matter what VALUE it reaches. They KNOW that gold performs in the time dimension. Only so many jet skis you can own in one lifetime. Think about that for a while. It has a lot of power. ;)"

Heh. What reason would they have to liquidate, indeed. Thank you.

Only so many Jet Skis. Or for that matter, Segways:

(Sorry, I know the above is totally off topic - but beyond ironic and my ability to restrain myself.)

Jose Castro said...


I started recently reading your blog, and basically you convinced me! ;) You advocate taking delivery of the physical, but I could not find any practical advice on storage. I am always on the move and it is not practical for me to carry it around. Would you say a safe deposit box in a bank is a good choice? Or maybe the Perth Mint program?


ps: VAT in europe varies from country to country (15 to 25%, and yes, you can buy PM directly from some of the main banks (e.g. (you ask confirmation of this somewhere)

Anonymous said...

Its official the PHD's and Doctors of voodoo economics have started conditioning their followers to expect a debt default via inflation

FOFOA, you stand vindicated in the Inflation VS Deflation debate as krugman outlines the policy

So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation(my note: We'll just print money and dump in in your front lawn!) that reduces the real burden of debt

Michael H said...

@ Dave Narby:

I will let you know when I trade silver for gold, but I doubt you want to follow me! I am a terrible trader, have no patience, and am prone to panic.

If gold:silver gets to 50:1 I think I would gladly trade in all my silver and thank my lucky stars.

Here is an example of what worries me, from a recent article by Adrian Douglas regarding silver manipulation:

Douglas finds that the silver price has a very tight correlation to the gold price. From June 2003 to September 2008, that relationship was

POS= 2.23*POG – 253…….…eq(1)

and from September 2008 to September 2010 it has been

POS= 1.92*POG – 431…………..eq (2)

The figures in the article graphically show that the new, post-crash correlation yields a lower silver price for a given price of gold, as well as the resulting GSR.

This change in correlation concerns me. If we are to see another financial crash in the near future, will the correlation of gold:silver change again? Or will the physical silver market uncoil, and do so before the freegold trajectory takes off?

So, the question is: is silver a coiled spring, or a squashed bug?

miked said...

hello Michael H

Without offering anything intellectual to the debate, just an opinion: Surely after silver's recent breakout the technical traders will aim to restore the pre 2008 ratio? This must have been the psychological reason for the under performance. Whether there was a fundamental reason nobody will ever know.

Edwardo said...

A very obscure outfit named Half Past Human see silver going to $600 dollars an ounce based on their own proprietary linguistics parsing of several years of internet material. Were gold to go to the equivalent of 55K in purchasing power, it's very easy to see $600 dollar an ounce silver, or more. Of course what will $600 dollar an ounce buy?

I like the idea that what might propel silver much higher is that it is perceived by many as the poor man's gold, and could, based on that perception alone, send it very high as people who can't afford gold buy silver. Perceptions can distort one's response to reality for quite some time as we have seen too many times.

Dave Narby said...

Hi Micheal,

If you really are a terrible trader, I will gladly pay you for your information so I can do the opposite!

Seriously though...

The question is, as always, timing.

With gold, that's easy: NOW. Buy it now. Now hold. Done.

Silver... Well... It's not gold. Thank you FOFOA! We know that silver will need to be traded for gold at some point.

Thanks for that link, I had seen it, but it's worth looking at again. IMO that is more evidence that silver is a coiled spring.

Eventually, it will be a squashed bug, but we are hoping to step off that before it impacts the golden windshield.

Check this out

The silver commentary there would likely cause FOFOA to clench his fists and prepare to throw his coffee cup through the screen (before he laughs like the Mogambo Guru as he realizes he doesn't own but a lick of silver, and can thus sit back and enjoy the show, and then perks up when Adrian Douglas gives another explanation not only to why FOFOA's price targets will be met, but *also the increase in purchasing power*).

But you and I own some silver, so how to trade it for gold?

IMO, we are likely to experience a mania in silver first. This is because the COMEX will probably experience a silver delivery failure given the lack of supply.

A soaring price in silver could also have the effect of suppressing the rise in the POG (gold doesn't go up as much due to traders and speculators favoring silver over gold).

The numbers in that video give a GSR of 25:1, assuming the ultimate price targets for both metals are met.

But I think it is possible for the GSR to get quite low before correcting. Possibly 12:1, and maybe lower (remember, manias go much higher than anyone expects)

So how to trade out?

I like to stagger in and stagger out (not from drink, I am a teetotaler!), which means I look to trade out in stages. For this example, I'll use 20% increments.

Let's say 50:1 is our first GSR "swap point", and 12:1 is our last one. That gives us a range, with an increment of 9.5 (50-12/5), so I will be looking to trade out (swap) at 50:1, 40.5:1, 31:1, 21.5:1 and 12:1.

Eventually it will 'correct' and return to it's historically 'monetarily unfavored' ratio of 50-100:1. But we will have scaled out by then.

Now... How do we know to scale out sooner, if those swap ratio targets aren't met?

I would say watch the POG. If it looks like it's entering into the parabolic mania phase so it's tracking similar to silver, then just swap some every couple months or so. That would mean the big boys are just buying both and not driving silver first.

I am not a great trader either, but at least this is a strategy.

I'll probably hold onto a small amount for sentimental reasons, but let's face it: It's sorta like money.

But to quote the original JPM: "Gold is money, and nothing else."

Michael H said...

@ SatyaPranava,

Yes, permaculture is a good way forward and everyone should do what they can to increase their access to home-grown food, even if they choose not to go commercial. And you are right that 'self-sustaining' can not only mean 'using no outside inputs', as I was interpreting it, but also 'running itself', as you pointed out. The latter is much better, clearly.

@ miked

Given the current price of gold, the current gold-silver correlation would put silver at $20.77, while the pre-Sept-2008 correlation would put silver at $26.61. Silver closed yesterday at $21.69.

So, while silver has broken out above its recent correlation, it is still far below where it would be if the 2008 shift had not occurred.

Dave Narby said...

@ MikeD

I can't speak for pro traders (don't know any), but I believe that the GSR is a fundamental indicator. Technical would be things like RSI, MACD, etc.

Technical traders are what will drive the GSR out of whack (if it is to happen).

Dave Narby said...

Hi Edwardo,

If gold goes to 55,000 and silver to 600, then we silver holders will curse our lot.

But if silver goes to 600, and gold goes to 6000 (en route to 55,000), and we swap at at that point, we will be jumping for joy.

Have you followed Half Past Human long? It looks iconoclastically and quirkily intriguing.

littlepeople said...

Michael H.:

You said we were not on a silver standard in 1933 to 1964, but only had silver coins. You said that to be on a "standard" convertibility of paper currency to metal is necessary. You may be too young to remember silver certificates, which were the immediate precursor to the FRNs. You could take silver certs to any bank and receive silver coinage. We were definitely on a silver standard.

Silver has always been recognized as a monetary metal, but only the prince, as gold is and will be the king. And so shall it be in the future. If only the giants have the gold (and the few of us tag-a-longs as FOFOA puts it) in which to store wealth, then the giants better figure out a way to either build impregnable castles, or else allow the proletariat another way to build wealth--silver has always been the poor man's gold, and so it shall be in the future.

As far as there not being enough silver to be considered a monetary metal, there is much silver (20 billion or so ounces of the 40 billion ever mined) stored away world-wide as teapots, jewelry, and the like. It is readily deliverable, 99.9% pure silver needed for investment grade (COMEX)that is in short supply. It is true that industrial processes use up silver, but the huge, current supply remains hidden due to too-low silver prices to allow for melt-down of granny's silverware.

I understand the validity of FOFOA's arguments about the giants preferring gold, but when push comes to shove, unless the giants (who will own nearly all the gold) can figure out a way to keep down billions of restless souls, then gold alone cannot be the preserver of wealth. There are too many people in the world who will say otherwise--many of them in Asia.

miked said...

>>So, while silver has broken out above its recent correlation, it is still far below where it would be if the 2008 shift had not occurred.

Have a little patience Michael, The breakout only happened a few days ago :)

littlepeople said...

It just occurred to me that if the giants, who will own almost all the gold, do not allow anyone else to build wealth, they might come to see value differently.

When when one of them ventures out from their gated walls, someone who owns a half-ounce of conical lead might be able to trade "not using it" for much of the giant's gold . . .

The gold-owning giants will still live in the same world as the gold-have-nots.

FOFOA, you stated in the past that gold will be distributed everywhere, far and wide, as freegold manifests itself. Yet, you also say that gold will "lie still" and the giants will never sell it.

Maybe this is where silver comes into play, as the poor man;s role it has served for millenia.

Edwardo said...

Yes, indeed, Dave. 6K an ounce gold to 600 dollar an ounce silver would be lip smacking great.

I have followed HPH for years and while many of their strange prognostications have been misses, and tend towards the excessively dire, they have had a few very notable hits. Two, in particular, come to mind, 9/11 and The recent Gulf of Mexico calamity.

HPH's ability to make correct predictions is about to be tested again in a major way since they have, for quite some time now, predicted early November, I believe from the 4th to the 8th if memory serves, as being a period that is more fraught, by several orders of magnitude, than the period around 9/11. They do not know if it is war, economic collapse, or some admixture to those or other set of catastrophe(s) that will be the proximate cause of all the tumult.

It is entirely possible, in fact, more likely than not, based on their track record, that they will be wrong and/or vastly overstate what comes about.

Jeff said...

Still no gold price smackdown, it just levitates near the high while occassionally setting new records. Methinks the game has changed; I used to believe there would be a smackdown which would result in a snap of the physical/paper bond. Now I lean toward the idea that the price will just drift higher until decoupling.

Michael H said...

@ Jeff:

We are at the end of the quarter, when the Euro marks their gold to market.

I wonder if we will see a smackdown on Oct 1st, like we saw on July 1st.

Mike said...


I thought about the same thing. From a TA point of view Gold and Silver may be due for a small correction and break their embedded stochastic.

But do you remember on July 1st what happened to the physical gold sales? Can they afford to let this happen again or should the paper price of gold continue to rise to remove the physical demand.

Most people are now thinking the same, when there is a small or large pullback then physical is bought as they are now certain gold is worth holding. i know i am.

High 5 said...

Thank you FOFOA for your enlightening words. I've been following you for a month and have learned a great deal.

I have a 30/30/40 mix of physical gold/physical silver/mining shares and plan to trade silver for gold @ GSR of 30:1 (wishfull thinking).

My question is this: When will the inevitable nationalization of mining occur in a general chronology of events? I'd like to take advantage of amplified returns as long as possible, during the run up in gold/silver, but would hate to get caught in a collectivization trap.

Pete said...

Wow, does anyone here actually read the articles?

All of these questions/ponderings have been covered already by FOFOA. Extensively!

And for all of this silver talk, talk of mining shares, etc... are you sure this isn't a case of believing what you WANT to happen, rather than what WILL happen?

Dave Narby said...

@ Michael H

"We are at the end of the quarter, when the Euro marks their gold to market.

I wonder if we will see a smackdown on Oct 1st, like we saw on July 1st."

Boy, I hope so.

I used to think there would be one last concerted attack on gold in a last ditch attempt to save the current system, but I no longer think that's in the cards.

Unknown said...

Mish is truly funny. His latest missive attempts to portray the proliferation of low-price stores, effectively selling junk, as evidence of deflation. Huh!? I guess ya gotta try anything to sell your spiel. Keep talkin your book Mish; no matter how wrong you might be.

Stick with FOFOA kids; you can't go wrong and even if we experience a delay in FreeGold, at least we know our heirs will be incredibly grateful (though I doubt we will have to wait that long).

Dave Narby said...


ATMs That Sell Gold Bars Are Coming Soon to America

(sniff-sniff... Is that Freegold I smell on the wind?!)

Unknown said...

If QE'2 comes to term and Gold does go above $2000+ then it say's, at-least in my eyes, that people are running from the dollar in an attempt to preserve wealth.

Very interesting times when we could hear another "Nothing to fear but fear itself" speech.

Desperado said...

Capital controls eyed as global currency wars escalate

Evans-Prichard nails it in a very troubling article.

Stimulus leaking out of the West's stagnant economies is flooding into emerging markets, playing havoc with their currencies and economies.

A rising chorus of people more intelligent than I am are realizing that the dam is going to burst sooner rather than later. The breaking point could well be the dollar reserve currency. What I can't figure out is why don't these countries buy gold instead of dollars?

Michael H said...

@ Dave Narby, September 29, 2010 8:01 AM

Your trading approach sounds reasonable. But, if the GSR ratio begins rising instead of falling at any point, when do you decide you are wrong?

That is what always gets me: deciding when to cut my losses.

Mike said...


right on queue for mark to market ending today hehe. gold down $12.

littlepeople said...

" . . .what WILL happen?"

Were you Nostradamus in another life? Until it happens, freegold is a theory.

It seems to me that simply just drinking the freegold kool-aide would result in the end of the blogging.

In my view, it is healthy to see things from different vantage points. I think no single man can know all past, present, and especially future.

ebikeguru said...

FOFOA Reveal thyself! haha

Nostradamus 1555:

"The copies of gold and silver inflated,
which after the theft were thrown into the lake,
at the discovery that all is exhausted and dissipated by the debt.
All scrips and bonds will be wiped out"

FOFOA 02/09/2010

"Only at the margin, where you reside, can physical gold still be had for $1,240 per ounce. But in aggregate, in the vaults of the world's central banks as the only reserve asset not tied to the medium of exchange, it is priceless, in the truest sense of the word".


1.618 said...

While the recent implementation of a Gold Dinar parallel monetary system in Kelamantan may indeed be a move back to an Islamic system, it may also have been endorsed by the Malaysian govt as a convenient way to frontrun Freegold, being that they, like other govts worldwide, can see the writing on the wall.

Dave Narby said...

@ Michael H (and FOFOA, there's a few things here for you, too)

"Your trading approach sounds reasonable. But, if the GSR ratio begins rising instead of falling at any point, when do you decide you are wrong?

That is what always gets me: deciding when to cut my losses."

Yes, that's the other half. I'm still working on that, here's my thinking so far.

Using GLD vs. SLV as a proxy, we can look at the relative performance of each

you can see in the last month silver has been kicking gold's ass (sort of like a midget wrestler jumping up and down on a sleeping Andre' the Giant. Just wait until he wakes up!).

I think this is due to a few factors, one is that the banks are more vulnerable on silver shorts than gold, so the cabal which is aiming to bring them down (see for a really, really interesting interview!).

Another is that silver took a bigger hit during the one-time deleveraging event in '08 and has some catching up to do

So for right now, we silver holders are doing OK.


What to watch will be these relationships, to see if gold starts to match silver in it's rise. As long as silver is outperforming, hold it.

But when gold starts to reach parity, you might want to check the GSR and maybe sell some.

If gold starts to consistently outperform, then trade a good chunk out. Probably not worth the stress, if you have a lot of silver.

The best case scenario is that silver enters a mania phase *well ahead* of gold. This is where it accelerates to the upside, then *really* accelerates. If this happens, start trading out on the falling GSR.

Probably it will fall somewhere between the two.

Another thing to watch is the general markets. If equities and bonds start to completely fall apart in a disorderly fashion, you may want to trade your silver sooner than later, because if things get too chaotic, you might not get an opportunity to trade out (physical needing to be shipped by UPS and all that).

My silver was more for local exchange than wealth preservation, but I like to speculate a bit, which is why we are having this conversation. : )

Dave Narby said...

Sorry about that guys, Google made me think my post didn't go through. Several times.

And damn that Nostradamus! Why couldn't he have given us a GSR target!?! XD

miked said...

I read the French original Nostradamus prediction and didn't mention scrips and bonds specifically :)

Yet another quote out of context. Don't trust anything you read on a conspiracy site.

I even saw Martin Armstrong recently using a popular internet quote from Cicero from 55 B.C. in one of his articles:

"The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”

When in fact the actual quotation was:

"The arrogance of officialdom should be tempered and controlled, and assistance to foreign hands should be curtailed, lest Rome fall."

Always check the source!

Desperado said...

This article provides some amazing background on Roosevelt's gold seizure. I had always thought that stealing of the peoples gold and the devaluation had been part of one big plan to force inflation and stop deflation.

Roosevelt’s Crusade against Gold

It shows just how capricious Roosevelt was and how little Progressives care about constitutional rights (this continues to this day).

In his first “fireside chat,” delivered on March 12, Roosevelt didn’t say a word about his backstage maneuvering to seize gold. He remarked that “hoarding during the past week has become an exceedingly unfashionable pastime.

Less than a month later, on April 5, 1933, Roosevelt issued Executive Order 6012, which expropriated privately owned gold. He ordered Americans to surrender their gold to the government by May 1, 1933. Violators would be subject to a $10,000 fine or as many as 10 years in prison.

In his May 7 “fireside chat,” he claimed that if Americans were free to buy gold, there soon wouldn’t be any left, and therefore in the interest of fairness he denied gold to everybody.
The professor replied that the government must buy more gold overseas! That would be done through the Federal Reserve Bank of New York. The first purchases were made on November 2. The New York Fed president, George Harrison, tried to convince central-bank officials in Britain and France that Roosevelt wasn’t engaged in monetary nationalism intended to harm their interests. But the continued rise in gold prices, and consequent fall in the dollar against major currencies, outraged the British and French who feared that with their currencies’ becoming more expensive, their producers would be priced out of world markets.
Roosevelt ranks among history’s biggest hoarders, with an estimated 190 million ounces of gold worth almost $7 billion after the dollar devaluation. Roosevelt undoubtedly hoarded gold for the same reasons that the mercantilist kings of the 16th, 17th, and 18th centuries hoarded it: because it was the ultimate money, and for a ruler money meant power. ”

The more things change, the more they stay the same.

Dave Narby said...

@ MikeD

You read French? Excellent!

Perhaps then you can clear up why so many translations of the quatrains show that Century VIII, Quatrain 28 say exactly what FOFOA put in his comment?

Google's machine translator of that Quatraine here

Les simulachres d'or et d'argent enflez,
Qu'apres le rapt lac au feu furent iettez
Au descouuert estaincts tous & troublez.
Au marbre escripts, perscripts interiettez.

Does in fact yield a different result:

The images of gold and silver puffed up,
After the theft were thrown into the lake
And dissipated to the discovery that all is troubled.
Marble writings, interiettez perscription.

Which looks to me fairly close.

(Although I would expect a machine translator to have problems with 16th century French (given most English speakers need a glossary to fully understand English works written about the same time, e.g. the works of Shakespeare).)

So... What's your translation?

littlepeople said...

Note that Nostradamus indicated both silver and gold.

Note also that the COMEX is running on silver fumes. We could see limit-up moves in silver til the day the NYMEX announces silver trading will be allowed only by sellers (no longs allowed)--or simply announces that it will no longer trade silver (or gold), as they are proving to be something other than mere commodities.

So long as they can manipulate SLV shares, GLD shares, pay 25%+ premiums to longs who agree to back off their physical delivery demands, demand leased physical back from rich uncles (Oracle of Omaha) comes to mind)then they can fend off reality another day. but those days are numbered, I feel.

Motley Fool said...

I would like to make a comment on those considering using arable land as a store of value.

What you fail to take into account is that in present civilized society , ownership of land is possible due to legislative and government enforcement. In the chaos to follow the only way to keep possession of your land would be to defend it from others, with guns.

If you are up to that challenge then it can be used as a store of value, if not I suggest you reconsider.

The Fool

miked said...

I don't remember who pointed it out but so they said, usually a failure of the gold standard supposedly ends in war as the creditor attempts to enforce the debtor to make good on his debts. But a failure of fiat ends only in poverty without great conflict as there is no debt to claim.

To be honest I didn't do my homework on this but it makes a lot of sense, so perhaps we should put the guns and barbed wire to one side :)

miked said...
This comment has been removed by the author.
miked said...

Hello Dave

I would not presume with my schoolboy French to be able to interpret ancient French poetry, but I will offer an alternative translation in circulation which obviously is less popular and hasn't been picked up by the conspiracy club (and no wonder):

The puffed up images of gold and silver,
which after the sack were thrown into the lake,
when found, shall astonish and disturb everybody.
The inscription[s] on the marble shall be interpreted as laws.

Dave Narby said...

@Motley Fool,

I would say it depends on the nation and region.

The farmers I know are typically family operations, and are typically well armed and highly competent with firearms, and typically have other friends and family members who are also at least passingly competent with firearms.

So, while it is true you do not own land in this country, (much like China, here you lease it from the state AKA property tax), when it gets down to brass tacks, there some laws you can enforce on some, and some not on others.

Dave Narby said...


Schoolboy French beats my non-French, (and anyway it's Renaissance French not ancient French, which I believe would actually be Gaulish, but whateva...).

In your translation, what is the meaning of "sack"? Because if it's a noun, that's one thing, but if it's a verb then it's quite another.

Edwardo said...

When it comes to old Nostradamus, it's more goulish than Gaulish.

miked said...

Dave - Sack in this case is sacking, as in plundering.

Edwardo said...

Make that ghoulish.

Anonymous said...

Just read martin armstrongs latest on Gold, as ever his writings about gold are cryptic, I never seem to understand whether he supports gold or not ?

miked said...

Heh, I don't think Armstrong supports gold like a football team Samix.

He is agnostic. He looks at gold as an imperfect tool. He writes extensively about the failures of hard and soft money. His view is the system is irrelevant, and it's the people in charge who make the difference.

Anonymous said...

hey miked, thanks for the observation

His view is the system is irrelevant, and it's the people in charge who make the difference.

now , that puts all his writings in perspective!

Unknown said...

Considering that it was "the people in charge" who framed him, gave him a mock trial and left him to rot in prison. It's understandable why Armstrong would favor the position he does.

Desperado said...

Hi Fofoa,

A couple of threads ago we were discussing food rationing and black markets and hyperinflation.

I made the point that the government would ration food through food stamp programs and priority resource deliveries.

Well this Senate Bill S. 510 just shows you how our leader and his band of merry Democrats are setting up the food supply chain for federal government control:

If this bill becomes law, the freedom to grow what you want, eat what you want and to share food from your gardens with your neighbors could be greatly curtailed. It would give the FDA unprecedented discretion to regulate U.S. food production.
So now the food giants are using "food safety" as a way to get market share back. It is an open secret that many of those involved in drafting this bill and in pushing it through Congress have ties to food industry giants.

Thousands of small food producers and organic farmers will have their very existence threatened by this bill. It imposes a bureaucratic nightmare on all food producers that the big corporations will be able to handle easily but that will cripple much smaller operations.
The following are 12 reasons why S. 510 could be absolutely disastrous for small food producers and for the U.S. economy....

#1 All food production facilities in the United States will be required to register with the U.S. government. No food will be allowed to be grown, distributed or sold outside this bureaucratic framework unless the FDA allows it.

#2 Any food that is distributed or sold outside of U.S. government control will be considered illegal smuggling.

#3 The FDA will hire an army of new inspectors to enforce all of the new provisions in the bill.

#4 The FDA will be mandated to conduct much more frequent inspections of food processing facilities.

#5 The fees and paperwork requirements will be ruinously expensive for small food producers and organic farms.


Desperado said...

... continued

#6 S. 510 would place all U.S. food and all U.S. farms under the Department of Homeland Security in the event of a major "contamination" or an "emergency". What exactly would constitute a "contamination" or an "emergency" is anyone's guess.

#7 S. 510 mandates that the FDA facilitate harmonization of American food laws with Codex Alimentarius.

#8 S. 510 imposes an annual registration fee on any facility that holds, processes, or manufactures food. It also includes draconian fines for paperwork infractions of up to $500,000 for a single offense. Just one penalty like that would drive a small food producer out of business.

#9 S. 510 would give the FDA tremendous discretion to regulate how crops are grown and how food is produced in the United States. Basically, small farmers and organic farmers will now be forced to farm exactly how the federal government tells them to. It is feared that the U.S. government would soon declare that many organic farming methods are "unsafe" and would outlaw them. In addition, there is the very real possibility that at some point the U.S. government could decide that the only "safe" seed for a particular crop is genetically modified seed and would require all farmers to use it.

#10 S. 510 will give the FDA the power to impose a quarantine on a specific geographic area. Basically the FDA would have the power to stop the movement of all food in an area where a "contamination" has been identified. This would be very close to being able to declare martial law.

#11 S. 510 will give the FDA the power to conduct warrantless searches of the business records of small food producers and organic farmers, even if there has been no evidence at all that a law has been broken.

#12 Opponents of S. 510 believe that it would eliminate the right to clean and store seed. Therefore, control of the U.S. seed supply would be further centralized in the hands of Monsanto and other multinational corporations.

The Federal government is already taking measures to get control of the food supply. They have already set up military emergency response swat teams and detention centers. They are in the process of gaining complete control over health care system. They already have the ability to shut down and censor the internet. Don't think that they won't outlaw possesion of gold if they think that suits their plan.

The tea partiers are our last hope.

Dave Narby said...

@ Desperado,

Wow. I really hope they try that!

Because if they do, I can almost guarantee they will lose complete support of local law enforcement, the National Guards, and the military.

Game over.

Desperado said...

@Dave Narby,

Just like the Nazi's in Germany, they are busy sealing all the exits. There are already de-facto capital controls, US tax law has been extended around the world and all the way into Switzerland, the government has the right to call anyone a terrorist at the border and lock them up indefinitely, they can monitor anyone's movement by GPS, and on and on, and soon anyone traveling domestically will be required to submit plans 72 hours in advance. Just as Martin Armstrong or Jim Willie.

Local law enforcement will be presented with the simple choice: take the red pill or the blue pill. Certainly, some jurisdictions will resist and others will go along. Some officers will resist on their own but the majority will go with the flow. I have no doubt that the major population centers will go with the flow, they don't have any agriculture anyway and in the majority the professional left anyway.

IMO, all the pieces are being put into place for a massive confrontation: Fly over country vs. the elites. The ruling class have been preparing for this for a decade. The question is: Are the flyover's prepared?

Dave Narby said...

@ Desperado,

The problem is that the Nazis had the people behind them. Not so much here.

It would also not go over well with the military. Unfortunately for the power elite, most of those guys took their oath to The
Constitution seriously.

The problem with local law enforcement is getting actual compliance vs. verbal compliance.

And "...the ruling class have been preparing for this for a decade. The question is: Are the flyover's prepared?"

From what I can tell, they have been preparing for several decades.

Be of good cheer. If history is any guide at all, fascists *always* overplay their hand.

Desperado said...

@Dave Narby,

You say "If history is any guide at all, fascists *always* overplay their hand."

You know, Franco stayed in power until he died. Many communist states have existed for multiple generations, think of China or Korea. One blatant fact is that the lifespan of a dictatorial regime is closely correlated to the degree of ruthlessness they are willing to pursue in order to maintain power.

Saying that even fascists eventually loose power is certainly no reason for "good cheer". And if I may say so, this is why I find the tendency of posters on this blog to stay "politically neutral" to be very frustrating. It reminds me of Switzerland in WWII. At least the Swiss can claim that they were a tiny country surrounded by fascists with no hope of being able to resist or change the tide of history. No such thing can be claimed by this blog.

Many generations throughout history have been forced to take a stance in defiance of what they considered evil. IMO, we are one of those generations. Mises and others have stated that one of the major weaknesses of fiat currency is that its debasement leads to the loss of confidence in the government. I think that this is a chicken/egg problem. This government is far more guilty of debasement of the entire culture than the currency ever was, and now is the time to take active measures to resist this fraud that they would have us believe is "government".

Edwardo said...

"At least the Swiss can claim that they were a tiny country surrounded by fascists with no hope of being able to resist or change the tide of history."

Then and now The Swiss are full of merde. They did lots of business with The Nazis, assisting the party and members of The Third Reich to sequester stolen and looted monies from their victims. The Swiss have not a leg to stand on.

As for the Tea Party being our only hope, is that the Tea Party of Sarah Palin or some other Tea Party?

dojufitz said...

$50,000 Gold discussed here among other Gold related value decisions..... always a good listen.

Desperado said...


"They did lots of business with The Nazis, assisting the party and members of The Third Reich to sequester stolen and looted monies from their victims."

Of course you realize that many "great" Americans such as Lindberg and Ford could be blamed for assisting the Nazi rise to power far more than the Swiss. And I am sure you realize that Roosevelt was always a communist sympathizer as were many in his government, and that is why the Russians ended up with the bomb in '49.

Either way you are making my case. Now is not the time to sit on the fence. Now is the time to break the back of the elite and burn down their CB based fiat-money prison. The easiest way to accomplish this is to buy gold and refuse to hold US government debt based fiat.

You can beat up on your straw man Sarah Palin as much as you please, but it doesn't change anything unless you can suggest some better way of restoring our constitutional rights. If you are suggesting the path to constitutional rights lies through the Democrat party or through the RINO's, then you simply aren't worth listening to.

Sarah Palin is little more than the red cape that the ruling elite keep waving in front of the useful idiots to prevent themselves from being gored.

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